SMEs mull switch to fintechs, digital banks as main finance service provider

More than one in three APAC SMEs consider switching to fintech.

Fintechs and digital-only banks are closing in on their traditional bank counterparts when it comes to being the preferred financial service provider of small and medium enterprises (SMEs) in the Asia Pacific, according to a survey by EY.

Whilst traditional banks with physical branches remain the most trusted financial service provider of SMEs in APAC—Singapore, Hong Kong, Indonesia, Malaysia, Vietnam, and Autralia—over two in five (41%) say that they are considering switching to another service provider as their main financial institution (MFI). Fintechs are the second most popular choice to switch into, with 35% of APAC SMEs saying such.

“Traditional banks have a higher level of trust than non-bank competitors and that is a competitive edge coming out of the pandemic, but these figures also suggest a significant opportunity for fintech and big tech companies to further disrupt banking,” EY said in the report.

Currently, traditional banks have no reason to be alarmed, however: about 65% of APAC SMEs receive financial services via a traditional bank with branches, ranging from a low of 50% for companies in Hong Kong to 73% in Malaysia.

Traditional banks with branches also remain the most trusted financial service provider to SMEs in the Asia Pacific, with a rating of 7.9 out of 10, higher than the 7.6 global average. In contrast, the rating is 6.8 for fintech and 6.6 for Internet/telephone-only banks.

But the market share of fintech and digital-only banks are also rising. An average of 41% of SMEs in the region currently receives services from a fintech or an internet/ telephone-only bank. Almost two in 10 or 19% named a fintech or neobank as their MFI, EY found.

In fact, some markets in the region have the highest usage of fintech as FIs in the world. More than a quarter or 28% of SMEs in Malaysia said they bank with fintech, followed by Hong Kong SMEs at 26%. 

Australia has the lowest share of SMEs receiving financial services from fintech, at only 14%. Globally, only Canada has a lower share (13%).

“Whilst SMEs’ overall satisfaction with their MFIs is high according to 77% of respondents—compared to a 72% global average—41% of them are inclined to switch offerings, higher than the 36% global rate,” EY said in a report. 

Amongst markets, SMEs in Vietnam, Indonesia and Hong Kong indicated the highest propensity for switching globally, with 51%, 49% and 48% saying they were likely or very likely to do it. 

“These huge changes impacting SMEs since the onset of the global pandemic mean most companies are laser-focused now on accelerating their digital transformation to gain efficiency, cut costs and pivot their business models, so banks also have to adjust to meet those needs, or they’ll be met by a fintech, big tech firm or other competitors,” said Andrew Gilder, EY Asia-Pacific Banking and Capital Markets Leader. 

“Competition is fierce, but there are many things banks can do to remain relevant to a fast-changing and increasingly demanding SME world. By focusing on areas like data analytics, for example, they can create new avenues for income, mitigate risks and truly tap into the SME business banking opportunity,” Gilder added.