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Sept 30, 2019

The banking needs of small and medium businesses (SMBs) are undergoing a drastic evolution – they need instant access to finance and want real-time updates on their working capital position and expected future cash flow forecasts. Banks are responding in kind – they are driving change and innovation in the industry by leveraging technology. But when everyone does the same things, how do you stand out?

We have identified five differentiators that can help transaction banks to not only gain competitive advantage but also maintain sustainable long-term market leadership.

1. Personalize customer segments
Gone are the days when a ‘one-size-fits-all’ approach worked. SMBs already expect a personalized banking service, perhaps that is why non-banking fintech players are gaining ground. No two businesses are the same, and neither should be the way that banks serve them. Banks need to place personalization of products and services at the center of their business model. They need to anticipate a business’s needs, have a single view of the customer and focus on frequent interactions in a strategic capacity instead of having one-off sales communications. For this, banks need to move away from legacy systems and fragmented databases that result in SMBs with different profiles receiving the same products. When banks achieve personalization at scale, it results in more sales and lower customer churn.

2. Identify high priority customer journeys
Personalization needs to be driven across the entire customer journey – from customer prospecting to engagement to retention. To do this, banks must develop a cross-channel ecosystem powered by technology and break down all digital and human channel silos. For instance, marketing and sales may want to identify the best action to take for someone at a particular stage in the pipeline, while operations may want to know the least expensive channel to serve customers and reduce costs. To identify high priority customer journeys, banks need to build customer personas, align the problems and aspirations of the customers with the path they should take during the buying cycle, and connect the different touch points. This will result in increased customer satisfaction, which means a bank has a better chance of becoming the principal banker.

3. Find new sources of revenue and maximize existing ones
To thrive in an environment that is highly competitive and where regulations are getting more stringent, banks need to tap into new sources of revenue. Open APIs are introducing new avenues for revenue generation, accelerating innovation, and delivering new services. Banks can earn income in the form of licenses or usage fees. New technology like analytics can be used to understand customers better, identify new business opportunities, and cross-sell to existing customers. Also, by building a product architecture that is open and flexible, banks can make real-time processing of payments a reality and realize their fee-based revenues faster.

4. Focus on reducing costs
Complexities are expensive – new products built on top of old ones and sold through a variety of channels with separate underlying processes introduces redundancy and increases the overhead costs. By automating back-end functions and processes, the staff involved in handling repetitive tasks can be reduced and instead have their focus shifted to revenue-generating ones instead. Digitization also adds transparency to the entire process making the management of audit trails more straightforward and reduce the risk of attracting penalties arising from non-compliance. Also, by adopting a component-based architecture, banks can drive down the cost of their back-end infrastructure and create a more efficient workflow.

5. Redefine the operating model
According to BCG when institutions digitize their operating model, they have the potential to increase revenue by 15% – 25%, reduce costs by 5% – 15% and improve return on regulatory capital by 5% to 10%. They can achieve this by offering a digital, self-service experience to small businesses, a hybrid “man and machine” offering for mid-market clients, and a highly personalized digitally augmented service model to large corporations. The main benefits of designing a future-ready operating model are the integration of services, faster and smoother execution of transactions, and reduced cost of serving clients.

Rethink your value proposition for success
The banking and financial services industry is ripe for disruption and transaction banks are in a unique position to serve their SMB customers, especially in the emerging markets, if they focus on these five areas of differentiation. SMBs want to engage with banks in a meaningful conversation about their financial lives and have them act as their “financial wellness coach.” Banks can achieve this by building new infrastructure (or strengthening their existing one) by adopting a digital transformation strategy that encompasses an end-to-end front-to-back approach.

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