SMEs may be unglamourous, but they form the backbone of our economies. And despite being resource-constrained, their contribution to socio-economic development is immense, both in terms of output as well as employment. SMEs are seldom accorded any appreciation for the role they play in society, but they go about their business day after day.
However, the landscape in which SMEs operate is vastly different from what it was even just a decade or two ago. This has brought with it a unique set of challenges that they haven’t faced before. To understand about what ails SMEs today and how they can rejig their business models in the face of disruption, we spoke with SME and digital banking specialist Debarun Roy Choudhury (Roy), who is driving the development of digital banking for SMEs in Singapore as Head, Business Banking and Solutions for Grow, AGB.
Mr Roy Choudhury, who has been instrumental in driving innovative solutions for SMEs in global and regional banks, also talks about the kinds of support SMEs need, and ways in which they can adapt.
Unravel: How have you seen SME business models evolving?
Debarun Roy Choudhury: If you go back even just 10 years, SMEs were essentially competing in a fairly domestic landscape. And before even that, their canvas wasn’t even domestic, it was more about the neighbourhood, because the world wasn’t nearly as connected to the degree it is today. In that, let’s say “simpler” time, as long as not too many people sold what you were selling, you were fine because there weren’t many other choices.
But as information has become more widely and easily available, and marketplaces have come about, the landscape has radically transformed. Now, SMEs are not just competing with others in their neighbourhoods and localities, but with SMEs from across the country and even across borders. That is a sea-change that has come about rather rapidly.
Consumers have several options, often at their fingertips, so it is imperative SMEs continue to provide value and remain efficient. There is a lot more competition today than there was back in the day and this is a result of the world no longer being disconnected. If SMEs want to remain competitive and continue growing, they have to work towards increasing accessibility. They have to compete with both small and big companies, pretty much on a global scale.
Unravel: It has become fashionable to use the term disruption as a throwaway, but this is what disruption is all about. A complete upending of business models…
Mr Roy Choudhury: Yes, that’s right. These developments have had tremendous implications on SMEs. In less than a generation, SMEs are having to deal with challenges that few people would have even thought of. It is also fashionable to call SMEs old school, but the scale of change they have faced—and withstood—is huge.
SMEs have traditionally not had the appetite to branch out into a multi-channel strategy, but all of that has been turned on its head.
Unravel: In this changed context, what do SMEs need to do?
Mr Roy Choudhury: Today, to succeed, among several other things, SMEs need to focus on: a) being able to sell to more people; and b) being more productive – they need to bring down their cost of goods sold.
SMEs need to maximise their customer base, in terms of both acquisition as well as retention. “What are the tastes and preferences of the customers I have, and of those that I have not reached yet?” An SME needs to tailor what it sells, to local tastes and preferences, potentially in markets alien to it and far away, and that’s not easy for SMEs. One of the key reasons why SMEs remain domestic is their inability to understand the nuances of other markets. This isn’t just about e-commerce. You can have an e-commerce portal, and sure, if you have the right kind of logistics providers and collection capability, you can reach out to other markets. But do you know what the local preferences of the Thai or the Indonesian markets are? There are a lot of cultural nuances, legal nuances, accounting nuances, governmental nuances – these are things that SMEs don’t usually have information about.
This pandemic has forced the hand of SMEs. In a Darwinian sense, those businesses that do not adapt, will simply perish. Give it another year or so, and those SMEs that are still resistant to change for whatever reasons – they won’t exist anymore.
Now they’re no longer fighting at the domestic level, but globally; and to go global, they need to know what works in specific markets. The changes we’ve discussed are challenging SMEs like little before it, but they’re providing opportunities too. The flipside to this whole evolution of the marketplace is that today an SME can reach different markets if it wants to, and the opportunity to scale without having to own the value chain or assets is also a significant advantage with the evolution of new business models. For example, you no longer have to own your own fleet for last mile deliveries, building and coding your own solutions is unnecessary, shared kitchens are a reality, and so on. And if it wants help in doing so, this help is available.
Unravel: Where from?
Mr Roy Choudhury: The help is fragmented. We have different service providers helping with different aspects. Which brings me to digital banks. The banks that will succeed will not provide just banking services, but will look to be business partners. Banks have to provide or facilitate services in areas considered non-core as well, and they have to do away with inhibitions around partnering with fintechs, other service providers, or even other banks. This is a mindset shift that we need to see in the banking and the financial services sector.
Separately, this also has to be done together between the private sector and government, with industry bodies coming together to make it work. For example, all the data that digital banks will generate, with the consent of the party concerned, can be made available to other partners in related areas to provide other services. If you follow that train of thought, you are essentially collaborating commercially to make sure that SMEs benefit. If this happens, banks get business, ancillary service providers get business and the ultimate beneficiary is the SME.
Now dial it back to the importance of SMEs to this region’s economies. All the support that the SMEs are provided, trickles down to the economy as a whole, considering their significant impact on GDP and employment.
This brings me back to the question we started with, around changing business models, driven by access to information and mindset changes, which has never been seen before. This is, in turn, resulting in challenges not seen before, and ways have to be found to address them.
Unravel: We’re hearing a lot about digitalisation among SMEs in the context of COVID-19. What are the changes you’re seeing? Is it an acceleration of what was already underway, or some sea changes too?
Mr Roy Choudhury: We are seeing things change in two ways. The first is that, of course, there is an acceleration in digitalisation. Singapore has always been forward-looking in this respect. Over the past three to five years, conversations and communications with SMEs have centred on productivity. “What you can do digitally should be done digitally, and not manually.” Productivity, however, is always a second order benefit that doesn’t stand out immediately, hence it usually requires a forward-looking SME to adopt the necessary tools.
And the second is that COVID left SMEs with no choice, really. This started on the revenue side, with the lockdowns. The moment revenue is hit, every business owner thinks about what needs to be done immediately – this is a first order challenge. In that sense, the biggest impact of COVID was SMEs realising the expansion of revenue channels is not something to consider, but implement without delay. A simple example is the various online ordering and delivery options and platforms, e-store builders and aggregators – there has been an explosion there.
In less than a generation, SMEs are having to deal with challenges that few people would have even thought of. It is also fashionable to call SMEs old school, but the scale of change they have faced—and withstood—is huge.
The background benefit of all of this is that we can now fundamentally curate data to a more structured digital format. And that opens up significant possibilities, say from a banking perspective. When an SME wants more financing, the banks that are capable, will be able to connect to these solutions. Then you don’t need to rely solely on audited financials, banks statements and the like.
Additionally, this accessibility and capability of analysing data generates further possibilities. This provides not just information, but insight that can be powerful enablers of decisions for business owners. Once this is done, then other forms of digitalisation are much easier to accomplish. For instance, if you are going to adopt digital ordering, then you might as well connect that to your accounting, your payroll and your procurement. Then you suddenly have an entire business model that has become more efficient. And that efficiency opens up significant possibilities for a better future.
But I digress. Coming back to your point, this pandemic has forced the hand of SMEs. In a Darwinian sense, those businesses that do not adapt, will simply perish. Give it another year or so, and those SMEs that are still resistant to change for whatever reasons – they won’t exist anymore.
However, should something like this ever happen again—and we hope it does not—the SMEs that have taken some steps to adapt, are going be better prepared. SMEs are resource-constrained and it’s not easy to plan for these kinds of things. In fact, it is almost ironic that it has taken a pandemic to accelerate the adoption of tools and solutions in a scalable manner.
* The second part of this conversation is focused on the changes in the banking ecosystem that Singapore’s new digital banks could bring, and will be published on Tuesday, 17 November.