Navigating the SME banking landscape in APAC

Touted as the engines of growth and innovation, small and medium sized enterprises (SMEs) play a vital role in ASEAN developing economies. By 2030, it is estimated that SMEs will contribute to 50% of the total GDP and represent 98% of all enterprises in the Asia Pacific region. According to the Asia-Pacific Small Business Survey 2023-24, optimism for growth among SMEs is at its highest in five years.

However, SMEs face distinct challenges when it comes to accessing finance, hindering their growth. The International Finance Corporation (IFC) estimates that 40% of formal micro, small, and medium enterprises (MSMEs) in developing countries have an unmet financing need of $5.2 trillion annually. The finance gap is most significant in the East Asia and Pacific region. SMEs often fall between organizational silos within banks, neither retail nor commercial - existing financing models designed for larger organizations do not apply well to SMEs due to transparency issues and information asymmetry, while they also do not fit into the templated models for retail banking, making them costly and risky to serve . It is essential for banks in the area to address the service delivery challenges effectively, some of which are: 

• Personalized requirements: SME-specific needs are personalized, making them difficult to define within standard banking frameworks tailored for larger enterprises.
• Digital capabilities: The financial transactions of SMEs are not inherently complex but often lack digital capabilities or progress at a slower pace compared to the digitization seen in retail banking.
• Financing gaps: Banks predominantly provide asset-based rather than cash flow-based financing. This creates a noticeable deficiency in the types of loan products that SMEs require.
• Broader technological needs: Beyond banking, SMEs require support from financial technology providers for accounting software, mini-ERP systems, and other tools, as they often cannot invest in full-scale enterprise solutions.

Solving the challenges: Reimagining SME banking

In today’s dynamic environment, the advancement of digital banking, foundational banking systems, and partnerships in financial technology unveil fresh prospects for banks to surmount challenges and capitalize on the SME Banking sector. To compete in the SME Banking segment, banks need a holistic approach that includes improved modeling and risk forecasting, leveraging the right functional partners from both a channel and services perspective, and building better products.

• A robust product strategy for nuanced needs: Serving SMEs adequately will require banks to have a detailed understanding of evolving needs so that solutions can be designed accordingly. Standing out by providing unique offerings is a viable route to success, but it hinges on having the necessary product agility. Banking systems with underlying composable architecture that supports third-party or custom integrations will have an edge in this aspect – our whitepaper throws more light here.
• Integrating data sources and analytics: SMEs leave their footprints across a wide range of service providers, be it payments or buyer-supplier interactions. Big data sourced from digital payment and cashflow histories, social media interaction, etc. can be used for alternate credit scoring models. Building better products and improving distribution will require banks to rethink their existing models and integrate a wider range of data sources - an insight led approach to banking. A core banking system with rich, broad, and deep banking coverage as well as the ability to integrate strong analytics capabilities will be crucial.

Let’s look at some examples here. Tonik Bank, Philippines' first digital-only neobank is upping its game in the SME lending space with their Big Loan product, focusing on a streamlined application process and flexible repayment options. IFIC Bank with Bangladesh’s largest banking network is bolstering financial inclusion by distributing loans to over 2,500 SME entrepreneurs nationwide through its extensive network of more than 1,200 'uposhakhas' (local business outlets). The game changer for both has been an enhanced customer experience throughout the loan process.

Future outlook: Technology and partnerships for better solutions

• Adopting & enabling digital mediums - With the adoption of digital mediums in most APAC countries, SMEs are more comfortable with digital solutions for banking. Offering a smooth digital experience across a broad set of functions such as onboarding, transactions management, loan applications, compliance etc. will be paramount to acquiring and retaining SME customers as well as reducing cost to serve for banks.
• Ecosystem-centric strategy - The emergence of new digital banks in APAC underscores the effectiveness of an ecosystem-centric strategy. Banks can benefit from an API-first, open core that integrates solutions from diverse fintechs, and provides new routes to market. For example, Jifiti which is a part of the Finastra ecosystem enables embedded lending services for small businesses across multiple channels. A previous blog - ‘An ecosystem approach to banking the underbanked’ elaborates on how banks can benefit from being an orchestrator in the APAC market that is increasingly being driven by ecosystem driven models. Forging alliances with other market players in the SME services ecosystem such as trade platforms, invoice financing etc. could help banks alleviate the customer experience greatly for SMEs.
• Strategic technology choices - While planning to capitalize on the SME banking opportunity, agility and adaptability are essential, where the choice of a technology partner will be a strategic decision that will profoundly impact a bank's trajectory. Technology chosen must not be just cutting-edge but also align with the intricate needs of the banking ecosystem. Banks in APAC should aim for a hybrid approach - a strong digital proposition, an effective branch and agency banking network and the right ecosystem partners with an underlying core system that supports the full gamut including the complex myriad of banking functionalities.

Finastra Essence delivers on the promise by being a truly modern, flexible, microservices based core banking platform that offers a broad range of functionalities along with powerful integration capabilities to connect to, and make the best of, emerging ecosystems. The solution’s rich, broad, and deep banking functionalities are combined with a product composer for rapid product creation. Established banks and emerging players across the globe are using Essence to accelerate growth in new segments and launch differentiated products and services.

Concerned about the risks of disruption and system fragility that comes with replacing your core? There is an alternative strategy to the usual ‘rip and replace’ method. Read our whitepaper to know more.