Will neo-banks win the European SME market?

Dissatisfied with the experience of traditional banks and little pre-empted, the SME market in Europe, valued at 300 billion dollars, remains to be seized by the neo-B2B banks.

The European Union brings together 24 million SMEs, or about one for every twenty citizens. According to the European Commission, SMEs employ nearly two-thirds of the EU workforce. In France, the nearly 3.5 million VSEs-SMEs employ 6.3 million employees and generate 43% of the added value.

Such statistics reveal the considerable economic weight of small and medium-sized enterprises and their importance for EU economies. Yet these companies have historically been neglected and underserved by banks traditional.

Unlike the latter, neo-banks (fintech companies also known as “challenger banks”) are delighted to attract this clientele in need of efficiency. We are currently seeing explosive growth in products and services aimed specifically at entrepreneurs, freelancers and small businesses. However, if we consider that a SMEs spend on average 74% of their time to activities outside their core business such as payments, accounting, paperwork, seeking investments or loans, this potential is far from being exhausted.

Traditional banks versus neo-banks: what are the differences?

Unlike traditional banks, neo-banks are not bombastic in disabling, bureaucratic and time-consuming processes. They can therefore provide more agile services to their customers.

Fees: Traditional banks often have a complex fee structure that includes monthly fees, online banking fees, transaction fees and other hidden charges – up to 30 euros per month in some cases. It can therefore be difficult for SMEs to predict their bank charges. In contrast, neo-banks offer clear pricing tiers, with fixed monthly fees. Some go so far as to offer free formulas! Also, many neo-banks do not practice negative interest rates.

Onboarding: Opening a business account with a traditional bank can be a slow and laborious experience: 56% of companies found opening a business bank account difficult. Chances are every SMB has had at least one time when the computer says no. In contrast, neo-banks typically offer an all-digital account opening experience, which can be completed in minutes, rather than days.

Customer Support: The same goes for general customer service inquiries. While traditional banks may require you to call or visit a branch, neo-banks typically offer online chat support, which means SMBs don’t have to listen to an hour of music. waiting whenever they have a question to ask. More importantly, the neo-banks online support features are of high quality. Thus, the absence of a traditional bank branch will not be regretted and the advantages of a digital customer experience will come into full play.

Additional features: To further differentiate their offer from traditional banks, many neo-banks are developing software tools that make life easier for time-poor SMEs. These include user-friendly web and app-based banking dashboards, as well as automated features for billing, reconciliation and more. Additionally, many neo-banks offer integrations with major accounting software platforms – Lexoffice, DATEV Online, sevDesk, FastBill, Sorted, etc.

An offer in the process of being improved

Despite the advantages mentioned above and the growing presence of European neo-banks, there is still a long way to go before neo-banks dominate the European SME banking market. This is a market valued at more than 300 billion dollars where fintechs currently only serve 3% of potential customers. Qonto, the largest player in this field, has 220,000 customers, or 0.8% of European SMEs.

Beyond the shores of the Old Continent, the model proposed by the neo-banks has had immense success. Brazil, the UK and Russia are at the forefront of service delivery to SMEs. For example, British B2B fintech Tide has 350,000 customers, more than 5% of all UK SMEs. Similarly, the Brazilian bank NuBank serves 1.1 million SMEsor 15% of the market, and its valuation is estimated at 41 billion dollars.

It seems desirable to consider how neo-banks in the EU can increase their market share.

First, the regulations around PSD2 and the legislation on Open Banking will accentuate neo-banking competition in the SME market. Neo-banks will thus be able to leverage additional opportunities to bring out the advantages of their offer over the slowness of traditional banks, by weakening the position of the latter on the market.

Also, it should be considered that SMEs could start to be more demanding with their banks. If everyone has become accustomed as a consumer to the convenience of digital banking services (96% of French people consult their bank account online or use the application according to Ifop), we should not be surprised at the same enthusiasm on the part of legal entities. For neo-banks, this translates into an opportunity to attract customers dissatisfied with traditional banks.

A niche in which the neo-banks can improve their offer is that of loans. Obtaining a loan from a traditional bank is an uphill battle for an SME. If the neo-banks shorten the deadlines and simplify the procedures, the use of artificial intelligence and data analysis would give rise to new innovative financing solutions.

In many ways, the EU, and France in particular, presents fertile ground to support the growth of B2B neo-banks: large economies, poorly positioned traditional players and companies keen to embrace new technological innovations. With this in mind, we can expect to see the emergence of a significant number of local fintech unicorns in 2022 and beyond.

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Will neo-banks win the European SME market?

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