For a long time, digital-only neobanks have been hailed as the future of banking, both for individuals and businesses. However, some years on from their first introduction, research is beginning to appear that suggests institutions of this nature are missing the mark when it comes to meeting the needs of their customers, particularly those running small and medium-sized enterprises (SMEs).
For those of us who work alongside SMEs regularly, this research doesn’t come as a massive surprise. Despite the hype surrounding digital-only neobanks, many SMEs still hold their primary account with traditional banks, preferring and trusting the experience offered to them by traditional financial institutions. As a result, the staying power of organisations, such as banks has been considerably longer than many commentators expected.
Cutting through the Noise
In fact, it’s been clear for some time that digital-only challenger bank and fintech solutions are often utilised by SMEs to supplement the relationship they have with larger, traditional financial institutions. Unfortunately, this is an aspect of the digital-only neobanking conversation, which has regularly been overlooked. As of 2023, traditional banks and physical challenger banks remain the obvious choice for SMEs looking to grow.
Importantly, this is despite the help of government-backed initiatives, such as the Banking Competition Remedies (BCR), which ringfenced money specifically to help neobanks challenge established incumbents across the market. Monzo and Starling both claim they have used their BCR commitment to achieve over eight per cent of market share, but it’s impossible to tell if the accounts they reference are used as primary or secondary accounts.
Despite the introduction of Banking Competition Remedies (BCR) in 2018 to expand competition among providers of financial services to SMEs there is very little evidence to suggest they have capture the primary business current account market of SMEs away from legacy financial institutions.
For some context, Monzo and Starling have both reported meeting their BCR commitments, each achieving over 8% market share on business current accounts. Monzo has publicly stated that it has over 250,000 business current account holders, while Starling has revealed it also has 520,000 small business accounts. However, as mentioned, solutions provided by digital-only neobanks are often only utilised by SMEs in conjunction with services provided by larger companies that offer both physical and digital experiences, so these figures might not tell the whole story.
I base this assumption on a number of factors, including several conversations I’ve had with SME owners across a myriad of sectors, as well as my own experiences using these services while building BankiFi. UK Finance, the trade association for the banking and financial services sector could provide clarity here by releasing the true numbers. If they did, it would be interesting to see if the 8% relates specifically to primary business current accounts.
Why the Lack of Uptake?
Instead, it seems more likely that the numbers cited by Monzo and Starling include a significant cohort of users that use their services as secondary accounts. This then raises the question, why aren’t we seeing the uptake we had expected in this market? It’s a multi-faceted issue, but there are some standout reasons that we hear time and time again from SMEs through our work supporting them here at BankiFi.
Let’s begin with the most obvious aspect, the lack of a physical dimension within digital-only neobanks. Many SMEs still value the face-to-face interactions and the wide range of product offerings provided by traditional banks. These institutions have built long-term relationships with SMEs by offering a comprehensive suite of financial services that cater to their unique needs and which ultimately serve them more effectively than digital-only neobanks.
Putting the Product First
Traditional financial institutions, such as banks are also far more likely to rank product-focused endeavours when looking to serve SMEs, which is another major factor in their continued dominance in this arena. By contrast, digital only neobanks tend to value other concepts, such as engagement instead. It was once thought this shift would be appealing to SMEs, but the approach clearly hasn’t worked.
That’s because, despite the wide array of SME businesses, many of them face very similar challenges, and have done so for a long time. Across many different sectors and geographies, small companies continue to struggle with basic business tasks, including getting paid on time and reconciling invoices. Despite a decade of fintech innovation, there’s still a lack of solutions designed to address these challenges.
Finding the Right Approach
Digital-only neobanks need to reassess how they serve SME customers if they want to gain a larger market share. While innovation is important, it should not come at the expense of understanding the basic needs of SMEs. Put simply, offering a more technologically advanced platform is not enough to win over SMEs alone. These customers continue to prefer the products and personalised support provided by traditional banks instead.
Financial institutions of this size have realised that while SMEs can vary, they normally require the same things. Most small-business owners want to spend more time running their business and minimise their administrative duties, focusing instead on core business activities. To do this, many traditional financial institutions are partnering with companies like BankiFi to create new solutions that address long-standing pain points.
Keeping Banks at the Heart of Business
For example, our ‘Pay and Get Paid’ solution, which can be white labelled by banks and other financial institutions, has been found to help SMEs get paid in one to two days on average. Crucially, that’s one to two days from the date an invoice was created, not the due date, which suggests that people are getting paid significantly in advance of the invoice due date, thus helping to free up cash flow.
As a business, we understand that banks and physical neobanks need to be at the centre of business but also recognise they have issues effectively communicating with business customers, especially SME owners. Our unique technologies are helping to bridge that gap and can ensure that SMEs can access tech-first solutions that put more financial control back into their hands in a moment of intense need.
For more information about BankiFi, please visit: https://www.bankifi.com/
Author: Mark Hartley