Merchant services and payment processing for small businesses
Banks can capitalize on rising demand among SMEs for digital payment solutions but they will have to overcome substantial competition.
SMEs are following the lead of big businesses by capitalizing on the power of digital services to improve their performance and drive growth. And the uptake of digital offerings opens huge opportunities for banks eager to provide SMEs with payment processing services.
There are close to 10 million SME merchants in Europe, alone, and demand for payment processing services continues to climb. Consumers increasingly expect quick, convenient and mobile payment options.
However, competition to serve SMEs with payment processing services is fierce. The stronghold banks once held on the payment business has been broken an army of innovative and agile competitors that have disrupted and fragmented the market. Fintechs, payment platforms, software providers and Big Tech companies are all jostling to provide SMEs with digital payment processing capabilities. Often, they have their eyes not just on payment fees but also on revenue from a host of other managed services.
To compete and secure a rich slice of the SME payment business, banks need to move quickly or risk losing further influence in a market they once dominated. But how should they respond?
“Some banks now have really fantastic payment offerings but others pulled out completely and are wondering how they can get back.”
Christian Löw, Partner, Financial Services - Payments, EYMeet SME payment requirements
First up, what do SMEs want from a payment processor?
- Inexpensive
- Fast
- Easy to use (by merchant and consumer)
- Convenient
- Automated
- Secure
- Simple to integrate (with POS and business systems)
- Scalable
- Well supported
These are the findings of a group of payment specialists, from consulting firm EY and major European banks Intesa Sanpaolo, Banco Santander and Millennium bcp, who shared their insights at an online event hosted by the Qorus SME Banking community. And their findings were supported by bank executives who attended the event (See poll results below).
“Many banks made a major mistake in the past by not seeing the bigger picture around payments. They only saw the investment it required. Some banks now have really fantastic payment offerings but others pulled out completely and are wondering how they can get back,” says Christian Löw, Partner, Financial Services - Payments at EY.
Löw points out that payments processing gives banks a valuable link to their customers. “It connects with customers’ daily touchpoints, their engagement with clients and a lot of other parts of their banking needs.”
Ken Burke, SME Banking Community Chairman, points out that payments solutions are particularly important for small businesses.
“It's really essential (for banks) to understand the evolving needs of SMEs and the critical role that streamlined, secure and versatile payment solutions play in their success.”
Track the entire customer journey
Advances in digital technologies have not only opened the way for banks to deliver innovative payment solutions to SMEs. They have also radically changed how SMEs select their payment providers. Banks need to ensure they have a strong online presence and a prominent commercial brand that will attract SMEs that will almost certainly begin their search for a payment processing provider on the internet.
“The main difference between SMEs and enterprise customers is that banks can’t go to visit them. Banks need strong branding and marketing to make sure they can be found. Furthermore, signing up has to be easy. Payments are not top of mind for business owners. Their focus is on products and sales,” says Löw.
It’s vital that banks looking to provide SMEs with payment solutions address the full span of the customer journey. It’s a journey that begins with the prospect’s initial search for a provider and stretches through to purchasing, onboarding and eventually meeting new requirements that arise from the growth of the client’s business (See below).
Payment provider customer journey – and provider requirements
- Provider search: Strong branding, sophisticated online SEO, effective word of mouth marketing.
- Choice of provider and offer: Standard products, bundles, and contracts, transparent and comprehensible pricing.
- Purchase: Fully digitalized sales process on website, mobile optimized checkout facility.
- Onboarding: Digital onboarding tools, dedicated customer support for troubleshooting, real-time technical infrastructure.
- Problem solving: Intuitive self-service portal, clear internal support responsibilities.
- Business growth: Predictive insights into new customer needs, easy integration of additional service features, scalable offerings, value-added services.
(Source: EY)
Alvaro Bujalance Rodriguez, Digital Business Transformation Lead at Banco Santander, says banks that are marketing payment solutions to SMEs must be able to scale their offerings. Such scalability is essential not just for their payment services but for all their SME banking solutions, he adds. If banks can’t continue to meet the needs of their SME customers that are growing their businesses, they will lose those clients. They’ll switch to other providers.
Nuno Mendes, Head of Payments Strategy at Millennium bcp, adds that banks have to communicate with their SME clients to ensure they understand the value and potential of the services they’re being offered.
Offer a one-stop solution
Most SMEs prefer to handle their payment processing within a suite of financial applications, notes Löw. They tend to avoid having to switch between different service providers and business products. Banks that can provide SMEs with a one-stop solution that includes payment processing will likely gain an edge on competitors. However, they will increasingly need to tie-up with partners if they’re to satisfy all the business needs of their SME customers.
Intesa Sanpaolo in Italy, for example, has teamed up with paytech firm Nexi to develop its new SoftPOS SME mobile payment solution. “The bank has sold 30,000 SoftPOS solutions in the first year of its release”, says Ylenia Amico, Digital Retail Senior Marketing Specialist at Intesa Sanpaolo.
“Payments is not a lot different to many of the other issues banks face. They should look at their portfolios, see what their customer base looks like and identify what their clients need.”
Christian Löw, Partner, Financial Services - Payments, EYEstablish a place in the SME provider ecosystem
In the past decade a vast and sprawling ecosystem has grown to serve the needs of SMEs. It comprises an array of participants that includes multinational online marketplaces, big retailers, payments processors, ERP software companies, fintechs, business services agencies, and financial services firms. To successfully market their payment solutions, banks need to stake their ground in this expanding and evolving ecosystem. They can build a strong independent presence, capitalizing on the extensive investments in technology, skills and marketing, or they can team up with complementary ecosystem partners.
EY’s Löw points to three types of organizations that enjoy a strong presence in the SME provider ecosystem (See below). Each is a potential payment partner for banks.
SME ecosystem giants
Software providers: software providers such as web shops and POS system suppliers, enable SMEs to offer, advertise and structure their product portfolios online. They act as the frontend to the customer, offer SMEs either e-commerce solutions, POS systems or both and are often focused on vertical markets such as hospitality or healthcare.
Payment providers: Dedicated payment acceptance providers enable SMBs to securely accept payments online and offline, offer POS terminals, gateway services and payment processing and collection services and are often integrated into the offerings of software providers. Some payment provides specialize is service SMEs and engage directly with merchants.
Embedded finance services providers: Specialized embedded finance service providers integrate their offerings seamlessly into software platforms for SMEs, enable merchants to gain quick access to digital banking or lending services, and help SMEs enhance their offerings, improve customer service and increase revenue sources.
Implement a business model
When choosing a business model to advance their payment processing business, banks will need to weigh up a variety of internal and external factors. Previous investment in payment processing, market presence and the level of acceptance of digital services among local SMEs are among the key considerations.
Löw emphasizes that banks need to think strategically rather than just react to recent changes in market conditions or new advances in technology. “Payments is not a lot different to many of the other issues banks face. They should look at their portfolios, see what their customer base looks like and identify what their clients need. Then they can place their bets, on a segment or a particular vertical.”
He cautions that banks that have yet build payment processing capabilities should avoid going into the market alone but instead look for partners. “If you’re asking yourself, should I build something, it’s probably too late.”
Banco Santander’s Alvaro Bujalance Rodriguez adds that banks should look to engage in partnerships that position them close to SMEs and allow them to offer quick and convenient solutions.
“Banks mustn’t be closed in their outlook. There are hundreds of payments companies out there, many of the them have now grown bigger valuations than banks.”
Payment provider business models
Sales partnership: Build sales partnerships with providers that are responsible for the relationship with customers. Banks gain revenue from the providers’ sale of the bank’s products.
Integration of provider services: Integrate the products and services of payment providers into the bank product portfolio and enter into revenue share agreements with providers.
Joint ventures: Build joint ventures with payment providers that take responsibility sales and customer relations. Such joint ventures can draw on the products, services and expertise of both parties.
In-house solutions: Develop merchant acceptance solutions in-house and own customer and sales relationships.
(Source: EY)
Seize new opportunities
The advance of digital technologies and shift from hardware solutions to software applications, which have marked progress in SME payment processing in the past two to three years, looks set to continue.
However, several opportunities are emerging for payment providers that can move quickly to meet the changing needs of SMEs.
- E-invoicing: The EU has mandated that all companies will need to be able to receive and process electronic invoices. SMEs will need to comply by September 2027.
- Artificial intelligence: Opinions differ on the influence of AI on payment processing but intelligent technologies will enable providers to enhance their offerings with, among other things, more accurate and tailored predictive services.
- Digital currencies: Digital currencies, particularly cryptocurrencies such as Bitcoin, are likely to become increasingly popular methods of payment.
- Consumer products: New digital products, such as wearables and online gaming environments, are likely to open new payment avenues.
- Value-added services: A host of SME business offerings are likely to be in demand as companies adopt new technologies, gain greater customer insights, and adapt to changing market conditions.
As the SME sector in Europe and elsewhere continues to grow and firms seek to exploit the benefits to new digital technologies and services, banks have an opportunity to renew their payments businesses. But they will need to move quickly and decisively.
