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

1 IMPROVING COMMERCE 2 FINANCING

SMEs most pressing Online sales Property loan
SMEs are ready to
challenges are "beyond and marketing apply for credit online
banking", such as promoting Group
purchasing Working capital but banks have not
BEYOND BANKING

products online and finding built the capability

Analytics Emergency finance
customers/suppliers

BANKING
IMPROVE
Online accounting
PRODUCTIVITY ERP
and invoicing 3 MANAGING CASH FLOW
CRM systems ENABLING Cash flow projections
Majority of SMEs are not
SME Working capital loan using online accounting
HR systems Invoice finance/ platforms but want to
factoring

Delivery Payments
logistics acceptance
Multi-channel Forex services
order aggregation
Cross border
MANAGE LOGISTICS Warehousing logistics 4 TRANSACTIONS
SMEs want to engage in
more international trade
but they need help
through the cross boarder
challenges they face

5 WILLINGNESS TO SWITCH BANKING PROVIDER

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

Incumbents

Challenger Banks

Information
business Software providers

Non-banking financial institutions

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

Improving commerce
An online accounting,
invoicing and cash flow 36% 47% 17%
40 management soulution

An ability to promote your 34% 51% 15%

product online
Managing cash flow

31 Advice on technical issues −

taxation, legal contracts,industry 34% 51% 15%
and foreign regulations

Managing staff turnover A group purchasing platform

where you can buy your supplies 28% 54% 18%

27 Provide business insights e.g.

pricing benchmark for products
like yours, spend analysis for all 28% 52% 20%
your business expenses
Access to credit
A listing page where you can look
for potential suppliers, connect 28% 56% 16%
24 with them and provide feedback

Access to a discussion and

networking forum between 25% 56% 19%
Managing logistics owners of similar business

19 Interact with my relationship

manager or other bank 24% 56% 21%
representatives on this platform

Managing transactions
Share articles relevant to your 23% 58% 19%
business industry/sector
19

I’m interested and would be I’m interested I’m not

willing to pay a small monthly fee but only if it is free interested

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

Copyright © 2018 Oliver Wyman

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
PREFERRED CHANNEL MOST RECENT LOAN MOST RECENT LOAN
FOR LOOKING FOR NEW APPLICATION |CHANNEL APPLICATION BY COUNTRY
CREDIT LINE
% of all repondents % of all repondents with loans % of all repondents with loans

8% 9%
14% 16%
21% 3% 1% 24% 24%
27%
6%
8% 38%
51% 7%
7% 7%
12%
30% of SMEs

11%

89% 90%
16%
80%
76%
72% 69% 69%
61%
61%

33%

APR SEMs APR SMEs TH VT ID MY IN HK SG AU

Online By phone Offline Increased online application usage

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

Copyright © 2018 Oliver Wyman

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 METHOD OF ACCOUNT KEEPING
% of all repondents, by account keeping % of all repondents, by account keeping
method and size method and size

15%
17% 19%

28%
36%

48%

42%

47%

44% 51%

41%

38%

44%
36%
29% 30%
23%
14%

APR SEMs Micro Small and Medium APR SEMs Micro Small and Medium

Manually Offline Online I’m intersted and would I’m interested I’m not
accouunting software accounting software be willing to pay a small but only if it is free interested
monthly fee

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

Copyright © 2018 Oliver Wyman

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
INTERNATIONAL TRADING ACTIVITIES OF SMES
% of repondents, by size

APR SEMs 26% 74%

Engage in Domestic
international trades only
trading

APR SMEs that

engage in 32% 44% 24% A top 1 or 2 A challenge, Not a
international trading challenge but not top challenge
1 or 2

PREVALENCE OF CHALLENGES MAKING INTERNATIONAL

PAYMENTS
% of all repondents with loans

0−40% 19%
Exports as % of Costs of Goods Sold

41−70% 8%

70−100% 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

Copyright © 2018 Oliver Wyman

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
OVERALL PRIMARY PRIMARY BANKING MOVEMENT BY COUNTRY
BANKING MOVEMENT

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

52 51
43 43
15% 38 37
32 33 31
26 19 31
25 21
20
27
24
59% 26% 19 18 17 15
13 11
3
ID VT MY TH IN HK SG AU

Switched Considered switching Did not switch or

and did not switch consider switching

PRIMARY BANKING MOVEMENT FACTORS1 BY COUNTRY

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

7%
24% 17%
27% 29% 31% 26%
39% 33%
40%

50%
49% 51% 38% 50% 33%
58%
48%
61%
89% 33% 31% 33%
24% 25% 24%
13% 13%
APR IN VT ID TH MY HK SG AU
Push factors Neutral factors Pull 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

Copyright © 2018 Oliver Wyman

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:

“Push” driven market
(e.g. Australia, Thailand)
“Pull” driven market
(e.g. Vietnam, Malaysia)
Incumbents Attackers
More focus on retention with Be very targeted and
enhancements to customer service, realistic about client pain
experience and relationship management points you can solve with
your attacker offer and
take-up expectations as
SMEs may not be willing
to switch easily
Introduce innovative products/solutions; Focus on headline
improve current customer experience 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 52K 337K 145K 50K 36K 24K 287K 37K
in play

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.

Copyright © 2018 Oliver Wyman

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Copyright © 2018 Oliver Wyman

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