5 Things You Need To Know About SME Banking In Asia-Pacific · this way. The trend is not just unique to micro businesses as we find 52% of small and medium-sized businesses keep

5 THINGS YOU NEED TO KNOW ABOUT SME BANKING IN ASIA-PACIFIC SME INSIGHTS SURVEY RESULTS

AUTHOR

Duncan Woods, Partner

INTRODUCTION

SMEs in Asia-Pacific have long been under-served by banks, often regarded as too costly or risky to serve and frequently caught between organisational silos that exist in many of the banks in the region. They also represent a huge part of our economies in Asia, contributing upwards of 50% of GDP and employment across the markets. So there is a significant, compelling opportunity for those financial service providers who can crack this space, but doing so requires detailed understanding of the evolving needs of SMEs so that solutions and service models can be designed accordingly.

In this paper, we share some headline perspectives from our extensive research and client work in SME Banking in Asia. Oliver Wyman conducted an SME survey across eight APR markets (Australia, India, Indonesia, Hong Kong, Malaysia, Singapore, Thailand and Vietnam) in 2017. A total of 2200 responses were collected with a combination of online, phone and field based primary research. All of the analysis and insights in this short paper are primarily derived directly from the survey results.

The exhibit on the right summarises the plan for the rest of this publication.

Note: We have used the following definition for SME. Micro businesses: Annual turnover of <$100 K; Small businesses: Annual turnover of $100K–2MM; Medium businesses: Annual turnover of $2–20 M

Copyright © 2018 Oliver Wyman

Exhibit 1: Overview of key messages

Software providers

Challenger Banks

Non-banking financial institutions

Information business

Incumbents

5 WILLINGNESS TO SWITCH BANKING PROVIDER

30−50% of SMEs in APR are open to switching primary banking relationships

BEY

ON

D B

AN

KIN

GB

AN

KIN

G

SMEs are ready to apply for credit online but banks have not built the capability

Majority of SMEs are not using online accounting platforms but want to

ENABLING SME

IMPROVE PRODUCTIVITY

MANAGE LOGISTICS

MANAGING CASH FLOW3

Payments acceptance

Forex services

Cross border logistics

ERP

CRM systems

HR systems

Delivery logistics

Multi-channel order aggregation

Warehousing

FINANCING1 2

SMEs want to engage in more international trade but they need help through the cross boarder challenges they face

TRANSACTIONS4

Cash flow projections

Working capital loan

Invoice finance/ factoring

Online accounting and invoicing

SMEs most pressing challenges are "beyond banking", such as promoting products online and finding customers/suppliers

IMPROVING COMMERCE

Group purchasing

Analytics

Online sales and marketing

Working capital

Emergency finance

Property loan

4

1 IMPROVING COMMERCE

SMES’ MOST PRESSING CHALLENGES ARE “BEYOND BANKING”. HOW HAS YOUR “DIGITAL SME STRATEGY” EVOLVED TO ENGAGE SMES ON THE THINGS THEY TRULY CARE ABOUT?

Exhibit 2: SMEs’ top business challenges and their interest in digital platforms

TOP BUSINESS CHALLENGES OF SMEs INTERESTED IN ONLINE BUSINESS PLATFORMS OFFERED BY BANKS

% of repondents % of repondents

An online accounting, invoicing and cash flow management soulution

36% 47% 17%

An ability to promote your product online 34% 51% 15%

Advice on technical issues −taxation, legal contracts,industry

and foreign regulations34% 51% 15%

Provide business insights e.g. pricing benchmark for products like yours, spend analysis for all

your business expenses28% 52% 20%

A listing page where you can look for potential suppliers, connect

with them and provide feedback28% 56% 16%

Access to a discussion and networking forum between

owners of similar business25% 56% 19%

Interact with my relationship manager or other bank

representatives on this platform24% 56% 21%

Share articles relevant to your business industry/sector

23% 58% 19%

A group purchasing platform where you can buy your supplies 28% 54% 18%

I’m interested and would be willing to pay a small monthly fee

I’m not interested

I’m interested but only if it is free

Improving commerce

40

Managing cash flow

31

Managing staff turnover

Access to credit

Managing logistics

Managing transactions

27

24

19

19

40% of SMEs consider “Improving Commerce” as one of their top two challenges, a finding

that is consistent across all countries, SME segments and industry sectors. “Cashflow

Management” is the next most cited challenge but for most banks it is not part of their core


offering to the SME segment. Interestingly, the core banking needs (e.g. “Access to Credit”

and “Managing Transactions”) have significantly less prominence on a relative basis.

This insight is timely particularly given the emergence of scale digital commerce platforms

across many APR markets. Their core proposition around “improving commerce” is likely

to attract SME owners’ top of the mind attention. These players can then embed banking

solutions (e.g. payments, credit) into their platforms while making the end provider of the

solution (e.g. banks) invisible and/or easily replaceable. Banks need to move “beyond

banking” in their SME value proposition to defend against such competitive threat of these

new set of competitors.

To their advantage, SMEs consider banks as a natural provider of many of the additional

solutions (e.g. accounting, invoicing, cash flow management solution), but few have

stepped up to the plate to deliver comprehensively in this space.

Call to action: Leading SME banks should move “beyond banking” in their SME value

proposition to address the top-of-mind needs of SME owners. Holistic solutions

involving collaborations with other (digital) service providers will be needed,

but finding the right partner, determining relative contributions and value shares,

and operating these partnerships effectively will be a new skill for many to learn.

Winning strategies for banks in their “home” markets where they have scale are likely to

differ from those in their “regional” or “attacker” markets. At-scale market leaders may look

to create platforms offering solutions to a broad set of SMEs and use partners to provide

“beyond banking” solutions. Attackers may instead focus of providing more tailored

solutions to address SMEs’ needs specific to certain sectors or ecosystems and will need

other ecosystem partners to help them access the opportunity and scale up.

6

2 FINANCING

SMES ARE READY TO APPLY FOR CREDIT ONLINE. ARE YOU READY TO DELIVER THAT CLIENT EXPERIENCE?

Exhibit 3: Channel preferences for loan applications

TH VT ID MY IN HK SG AU

PREFERRED CHANNEL FOR LOOKING FOR NEW CREDIT LINE

% of all repondents with loans

MOST RECENT LOAN APPLICATION |CHANNEL

APR SMEsAPR SEMs

30% of SMEs

% of all repondents with loans

MOST RECENT LOAN APPLICATION BY COUNTRY

72%

21%

7%

33%

51%

16%

8%

3%

89%

80%

14%

6%

76%

8%

16%

69%

7%

24%

69%

7%

24%

61%

12%

27%

61%

11%

38%

90%

9%

1%

Increased online application usage

% of all repondents

Online OfflineBy phone

Across markets in APR, more than 50% of SMEs are already looking for their new credit line

online. However, only about 20% of SMEs have managed to follow through and submit their

loan application through online channels. The share of SMEs who have applied through

online channel varies significantly by market, with Thailand at one end of the spectrum at

<10% and Australia at the other extreme at ~40%.

We interpret this as a significant untapped opportunity for supply side participants. SMEs

are essentially ready to adopt online channels as a primary channel to discover credit

offers and to apply, but the supply side is falling short in enabling an end to end online

credit application. This is aligned to our observations of banks in the region where typically


the digital agenda is far less advanced (and less of a focus) in the SME segment than in

Consumer Banking.

In Australia, where the supply side has enabled an online credit offer, SMEs have embraced

digital application processes. In other markets (e.g. India, Indonesia) Fintech players

are increasingly targeting this untapped opportunity while many major banks are yet to

catch up.

Call to action: Leading lenders in the SME segment need to develop a digital credit

offer to retain their market position. Attacker banks and Fintechs can still look

to gain first mover advantage in the digital credit space though the window of

opportunity is likely to shrink in next 2-3 years.

Size of the opportunity: We estimate “SME digital credit” to be a very significant across

most of the APR markets. For a large market like India this opportunity is estimated to

be ~US$ 46BN in total outstanding, in Indonesia with the opportunity is ~US$ 15BN

and even a small market like Singapore has an opportunity ~US$ 5BN.

8

3 MANAGING CASH FLOW

MAJORITY OF SMES ARE NOT USING ONLINE ACCOUNTING PLATFORMS, BUT THEY WANT TO. HOW ARE YOU INCLUDING THIS IN YOUR SME PROPOSITION?

Exhibit 4: SMEs’ use of and interest in online accounting solutions

METHOD OF ACCOUNT KEEPING

MicroAPR SEMs

29%

44%

28%

Small and Medium

38%

48%

14%

23%

36%

41%

MicroAPR SEMs

30%

51%

19%

Small and Medium

42%

15%

44%

36%

17%

47%

% of all repondents, by account keeping method and size

METHOD OF ACCOUNT KEEPING

% of all repondents, by account keeping method and size

I’m intersted and would be willing to pay a small monthly fee

I’m not interested

I’m interested but only if it is free

Online accounting software

Manually Offline accouunting software

Despite the trends towards going digital, almost two-thirds of SMEs in APR are still not using

online accounting software. More starkly, nearly a quarter of SMEs perform their accounting

manually – this is most pronounced in Hong Kong, with 33% of SMEs doing their accounting

this way. The trend is not just unique to micro businesses as we find 52% of small and

medium-sized businesses keep their books either offline or manually.

SMEs, however, are interested in making the switch online. This is understandable given

online accounting software is more accessible (via any connected device), secured,

integrated (can enable direct invoicing) and often less expensive than offline offerings. More


than 80% of SMEs indicated that they were interested in receiving an online accounting,

invoicing and cashflow management solution from their banks; and 36% said they would be

willing to pay for it.

Integrating accounting software solutions with core banking platforms provides a direct

monetisation from operating account balances and payments. Beyond direct monetisation,

access to real time accounting data is perhaps the most valuable SME data asset that a

banking service provider can hope for. Such data feed can be used to identify solution

needs (e.g. short term parking of excess cashflow in money market account), drive decision

analytics (e.g. using transaction level data to make unsecured credit decisions) and provide

other value-added services (e.g. comparative analysis of SME performance vis-à-vis SMEs

with similar profile). Moreover banking integration with accounting software also helps build

stickiness and loyalty.

Call to action: Leading banks in the SME space should be looking to offer banking

services that can integrate seamlessly with online accounting solutions – key will be

to negotiate the desired extent of data access from the accounting services provider

and ensure clients have a compelling reason to provide consent to share their data.

10

4 TRANSACTIONS

SMES WANT TO ENGAGE IN MORE INTERNATIONAL TRADE, BUT THEY NEED HELP THROUGH THE CROSS-BORDER CHALLENGES THEY FACE. HOW ARE YOUR TRADE PROPOSITIONS ADDRESSING THAT NEED HOLISTICALLY?

Exhibit 5: SMEs’ transaction banking challenges

APR SEMs

APR SMEs that engage in

international trading

0−40%

41−70%

70−100%

INTERNATIONAL TRADING ACTIVITIES OF SMES

% of repondents, by size

PREVALENCE OF CHALLENGES MAKING INTERNATIONAL PAYMENTS% of all repondents with loans

Exports as % of Costs of Goods Sold

A top 1 or 2 challenge

Not a challenge

A challenge, but not top 1 or 2

Engage in international trading

Domestic trades only

32%

26% 74%

44% 24%

19%

8%

3%

A quarter of SMEs we surveyed across APR are trading internationally, specifically 20% of

Micro businesses and more than 33% for Small and Medium-sized enterprises (as expected,

the percentages vary significantly across markets, ranging from only 6% in Australia to 33%

in Hong Kong).

International commerce comes with a certain set of complexities. 76% of internationally

trading SMEs highlight cashflow management as a challenge, with more than 30%

registering this as one of their top two challenges. The degree of challenge they face


often depends on their level of international trade exposure. SMEs with <40% of their

sales revenue coming from international trade are lot more likely to call out “international

payments” as a top challenge vis-a-vis SMEs with a significant majority (>70%) of their sales

revenue coming from international trade. There is also significant country level variation in

“international payment” related challenge; for example, 33% of internationally trading SMEs

in Malaysia highlight this as a challenge but the same number is only 6% for similarly active

SMEs in Singapore.

Of the 74% of SMEs who stated they are not yet internationally active, 50% of these are

interested in exploring international market opportunities. However, ~70% of these

cite being discouraged by complicated logistics and 45% cite discouragement from

complicated regulations.

Call to action: Increasing international activity of SMEs is a significant opportunity for

financial service providers, but most existing cross-border solutions are still focused on

commercial and corporate enterprises. Banks can target the SME cross-border trade

opportunity by offering easy to use, low cost, standardized cross-border solutions in a

digital platform and providing access to non-banking solutions and advice to help them

overcome networking, logistics and legal/customs documentation challenges.

12

5 WILLINGNESS TO SWITCH BANKING PROVIDER

30-50% OF SMES IN APR ARE OPEN TO SWITCHING PRIMARY BANKING RELATIONSHIP. HOW ARE YOU LEVERAGING OPPORTUNITIES AS AN ATTACKER OR DEFENDING YOUR INCUMBENT TURF?

Exhibit 6: SMEs’ propensity to switch primary banking provider

ID VT MY IN HK SG AU

32

52

19

26

17

43

15

21

11

2027

31

3

18

33

51

3137

13

25

38

24

19

43

TH

40%

7%

61%

OVERALL PRIMARY BANKING MOVEMENT

% of all repondents who switched primary banks in the last 24 months

PRIMARY BANKING MOVEMENT BY COUNTRY

% of all repondents who switched primary banks in the last 24 months

PRIMARY BANKING MOVEMENT FACTORS1 BY COUNTRY

Switched Considered switching and did not switch

Did not switch or consider switching

Push factors Pull factors

15%

26%59%

IN VT ID TH MY HK SG AU

89%25%

24%

51%

APR

27%

49%

24%13%

29%

58%

33%

50%

17%

31%

38%

31%

24%

26%

50%

33%

33%

33%

13%

39%

48%

Share of respondents who switched primary banks in the last 24 months

Neutral factors

Of the SMEs surveyed, 15% had switched primary banks in the last two years, and a further

26% had thought about switching in the past 12 months, though switching propensity

varies considerably across markets. In less mature, high growth markets (such as Indonesia


or Vietnam) more than 50% of SMEs have switched their primary banking relationship or

considered doing so over the last 24 months. In more mature, lower growth markets (such

as Singapore or Australia) this number is much lower (~30%) with only 3% of SMEs actually

switching in Australia.

The different switching dynamics and the underlying drivers of this client behaviour

across markets are important to understand for both incumbents and challengers. For

example, “pull” factors, whereby clients are attracted to another bank’s proposition, have

considerable sway in markets like Vietnam or Malaysia, whereas “push” factors, such as

being unhappy with their existing bank, are cited as major reason for switching in Australia

Call to action: The table below provides a high level summary view for incumbents

and attackers:

Incumbents Attackers

“Push” driven market (e.g. Australia, Thailand)

More focus on retention with enhancements to customer service, experience and relationship management

Be very targeted and realistic about client pain points you can solve with your attacker offer and take-up expectations as SMEs may not be willing to switch easily

“Pull” driven market (e.g. Vietnam, Malaysia)

Introduce innovative products/solutions; improve current customer experience

Focus on headline innovation that may have broad market resonance (e.g. digital credit solution)

Size of the opportunity: High propensity to switch service provider opens up significant

opportunity for challenger institutions to win new relationships. The table below

shows the number of SME primary relationships in play across markets if the SMEs

continue to exhibit their last 24 months of switching behaviour over the next 24

months as well

Country Australia India Indonesia Hong Kong Malaysia Singapore Thailand Vietnam

No of SME relationships in play

52K 337K 145K 50K 36K 24K 287K 37K

14

CONCLUDING REMARKS

The SME Banking opportunity in Asia-Pacific is a significant untapped opportunity for financial services providers in the region. The landscape is rapidly evolving with economy wide digitization, advancing regional and global economic integration, and increasing use of digital tools by SME owners to run their businesses. These trends are shifting SMEs’ own service and solution expectations and creating opportunities for innovation in the way in which SMEs can be effectively and profitably served. For banks wishing to participate in this space, now is the time to be re-evaluating strategies and business models as the convergence of these trends creates new opportunities for all players, challenges for incumbents and space for disruptive challengers.

In this paper, we highlighted five key findings with cross market resonance. Our APR SME primary research and our continuing body of client work on SME Banking allows us to go much deeper (for example understanding SME sectoral dynamics in a particular APR country of interest) and/or focus on more specific topics of interest (for example understanding player specific competitive standing in SME customer experience in a specific country).

Feel free to contact the authors to arrange for discussions to ain detailed insights focused on individual markets or how we can help your institution shape its SME banking business to capture the opportunity in this under-served segment.


Oliver Wyman is a global leader in management consulting that combines deep industry knowledge with specialized expertise in strategy, operations, risk management, and organization transformation.

For more information please contact the marketing department by email at [email protected] or by phone at one of the following locations:

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+1 212 541 8100

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+44 20 7333 8333

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The information and opinions in this report were prepared by Oliver Wyman. This report is not investment advice and should not be relied on for such advice or as a substitute for consultation with professional accountants, tax, legal or financial advisors. Oliver Wyman has made every effort to use reliable, up-to-date and comprehensive information and analysis, but all information is provided without warranty of any kind, express or implied. Oliver Wyman disclaims any responsibility to update the information or conclusions in this report. Oliver Wyman accepts no liability for any loss arising from any action taken or refrained from as a result of information contained in this report or any reports or sources of information referred to herein, or for any consequential, special or similar damages even if advised of the possibility of such damages. The report is not an offer to buy or sell securities or a solicitation of an offer to buy or sell securities. This report may not be sold without the written consent of Oliver Wyman.

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5 Things You Need To Know About SME Banking In Asia-Pacific · this way. The trend is not just unique to micro businesses as we find 52% of small and medium-sized businesses keep