Cash management in Asia Pacific: looking beyond, into the SME segment

Written by Shweta Shivaraja Global Solution Consulting
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The SME segment is a key economic component in the Asia Pacific region. Across the region, 97% of all enterprises are SMEs. They employ 69% of the labor force and contribute 41% to the GDP1. Despite this segment being such a significant contributor to the GDP and employment landscape, SMEs have received the short end of the stick when it comes to financial services.

There are several reasons why traditional banks have been playing on the back foot with this segment. SMEs are fragmented and diverse with varying needs, banks often require more economies of scale to justify addressing these markets. More importantly, banks consider the segment as high risk, and while this is mainly due to the banks’ inability to effectively to assess SME risk, it’s no surprise that SMEs have lower access to funds, with only 54% of the demand being met by banking sector2.

Cash Management for SME – current need

The fact that SMEs don’t have the access to funds makes it imperative to manage their available cash and funds flow effectively. SMEs, unlike the larger corporates, do not have the expertise, bandwidth, or scale to invest in a comprehensive in-house banking infrastructure.

Research from GVR demonstrates how the SME segment is anticipated to register the highest growth over the next eight years in the adoption of cash management systems3. Clearly, the demand for software solutions to manage cash flows is growing in importance for SMEs, and this represents an opportunity for banks to form sticky relationships.

Despite the obvious need, most SMEs are still reliant on manual techniques to manage their cash flows. Historically this may have worked, but the recent COVID-19 pandemic has left the SME segment exposed. According to a NBER paper4, 75% of the small business survey respondents had less than 2 months in cash reserves. With the increasing frequency of such adverse events, managing liquidity and forecasting availability has become extremely important.

COVID-19 has also necessitated increased demand and adoption of digital solutions. While on the retail side, digitization has been de rigueur for the past few years, COVID-19 has fast tracked the same for the B2B space as well. Whether it is the way the that end-users consume products and services or the way SMEs conduct the day-to-day operations, SMEs expect banking services to run in a more modern, digital and efficient way.

The SME segment stands to benefit from an automated, digital cash management solution. Ideally, this solution should provide a complete view of their business and include services for payments, receivables, invoice management, financing, accounting, and reconciliation.

How Banks can help – look beyond payables and receivables

Banks have traditionally served the segment on the transaction end - payables and receivables with focus on cash and physical instruments. Recently, with the growth of real-time banking and digital payment systems, banks’ coverage has expanded to include electronic systems as well.Banks have focused on automating large volume payments, which has led to operational efficiencies. But the aspects of effective liquidity and cost management are largely ignored.

SMEs are increasingly realizing the importance of cash management, now is the time for banks to step in and fill the gap.

Banks have the experience in providing liquidity management to their larger corporate customers. They would benefit from extending this experience to help SMEs define a long-term liquidity strategy and effectively use the tools at their disposal. Cash concentration, for example, allowed by regulators across the Asia Pacific region, can also help smaller businesses to optimize funds utilization, and reduce interest costs. Cash forecasts which have also been domain of larger corporates, need to be extended to SMEs as well. Now, more than ever before, smaller organizations need to be able to forecast their future flows to address any shortcomings or utilize investment opportunities.

In addition, newer products like virtual accounts, will also prove very useful for SMEs that are looking to better manage their payables, receivables, and reconciliation. Virtual accounts have significant benefits, including the rationalization of number of accounts, traceability of transactions for easier reconciliations, better funds management and provide overall operational and cost benefits.

While provision of comprehensive cash management addresses the liquidity management aspects, providing self-serve capabilities addresses the digitization. The digital push would mean that banks would need to focus on mobility, providing information, advice, and the ability to transact on the go.

Reducing cost to serve and enhancing time-to-market for banks

The challenges faced by banks in catering to the SMEs still exist due to the fragmented nature of the business and low price appetite for banking products. But today’s technology allows banks to provide a diverse set of services at a lower cost.

Cloud-based deployments and software-as-a-service models reduce the cost of solutions, meaning banks can invest in flexible solutions that serve the various nuances of SME business in a modular and agile way. Cloud and SaaS also enable banks to create unique product bundles at various price points more easily at varying levels of service for businesses, depending on the customers’ size.

Looking to the future, and open applications allow for easier integration capabilities, allowing banks to look beyond their own offerings and provide an attractive solution for the SME needs via fintechs. Banks connected to secure open networks, like, can build their offering through pre-integrated solutions with cheaper and much quicker integrations, while still delivering best in class functionality for SMEs.

Despite the challenges, this sector is extremely promising due to its large untapped nature, continued growth trajectory and the latent demand for the products.

It’s time to look beyond pure transactional support and provide true cash management to this ignored sector.

2 SME Banking – A Growth Opportunity in the Asia Pacific – Twimbit
3 Grand View Research

Written by
Shweta Shivaraja

Shweta Shivaraja

Global Solution Consulting

Shweta has over 18 years’ experience in banking and banking technology. She is part of the Finastra global consulting team for transaction banking and is passionate about studying the key trends shaping the banking sector.

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