It’s been more than 25 years since Bill Gates dismissed retail banks as “dinosaurs,” but the statement may be as true today as it was then. Banking for small and medium-sized enterprises (SMEs) has been astonishingly unaffected by the rise of the Internet. To the extent that banks have digitized, they have focused on the most routine customer transactions, like online access to bank accounts and remote deposits. The marketing, underwriting, and servicing of SME loans have largely taken a backseat. Other sectors of retail lending have not fared much better. Recent analysis by Bain and SAP found that only 7% of bank credit products could be handled digitally from end to end.
How Banks Can Compete Against an Army of Fintech Startups
Banking for small and medium-sized enterprises (SMEs) has been astonishingly unaffected by the rise of the Internet. Small businesses are starting to demand banking services that have engaging web and mobile user experiences, on par with the technologies they use in their personal lives. New digital entrants have spotted the market opportunity created by these dynamics, and the result is an explosion in online lending to SMEs from fintech startups. There are four broad strategies that traditional banks could pursue to compete or collaborate with emerging online players — and in some cases do both simultaneously. The choice of strategy depends on how much investment of time and money the bank is willing to make to enter the new marketplace, and the level of integration the bank wants between the new digital activities and their traditional operations. Two of the four options are low-integration strategies in which banks contract for new digital activities in arms-length agreements, or pursue long-term corporate investments in separate emerging companies. On the other end of the spectrum, banks choose higher-integration strategies, like investing in partnership arrangements, where the new technologies are integrated into the bank’s loan application and decision-making apparatus, sometimes in the form of a “white label” arrangement.