89% of SMBs may Switch to Challenger Banks & Alternate Paytech Providers

New payment methods (instant payments, e-money, mobile and digital wallets, account-to-account, QR codes) are leading the charge with consumers, but the looming threat of recession and rising inflation rates, combined with ongoing geopolitical issues, is posing a slew of new challenges.

Despite these global headwinds, the Capgemini Research Institute’s World Payments Report 2022 found that new payment methods are expected to increase from around 17% of total non-cash transactions in 2021 to around 24% by 2026. However, while B2C payments have thrived, the B2B value chain has far too often been overlooked.

Despite recent unprecedented market volatility, the payments industry has remained resilient, aided by the adoption of innovative new digital payment methods for consumers. However, many banks fail to provide the same level of assistance to small and medium-sized businesses.

According to the report, despite promising post-pandemic recovery levels, small and medium-sized businesses (SMBs) continue to struggle with cash flow issues and conversion cycles, impeding many from entering the next phase of growth. As a result, there has been an increase in the demand for payment service providers to step up, realign their priorities, and assemble the necessary tools to assist SMBs in exploring new market opportunities.

Jeroen Hölscher, Global Head of the Payments and Cards Segment, Capgemini, said, “Small and medium businesses are the backbone of global economic growth, contributing to half of global GDP and global employment. And yet, they are some of the most affected by the recent market volatility. Banks and payment service providers must realign their priorities to capture this untapped value through innovative and experiential payment services.”

Assemble the right building blocks to enhance SMB journeys

While the SMB market segment is now worth more than USD850 billion globally, the report claims that the legacy banking industry frequently overlooks SMBs in favor of larger corporate accounts and the larger retail market.

As a result, small and medium-sized businesses frequently face cash flow issues, cybersecurity risks, low liquidity, and operational inefficiencies, which exacerbates the existing dissatisfaction with incumbent payment service providers. Indeed, 89 percent of SMBs surveyed believe their primary banks are underserving them and are considering switching to a more accommodating alternative PayTech challenger.

A shift towards a digital payment provider would allow SMBs to reflect the trend that is already underway in consumer markets. For example, the report found that worldwide B2B non-cash transactions are expected to increase at a CAGR of ~10% during 2021-2026.

To win back SMB loyalty, banks will have to amplify platform value which can only be unlocked through tackling restrictive legacy systems currently stifling growth.

The report found that more than a quarter of banks struggle with monolithic and inflexible infrastructures, with 75% of the executives prioritizing costs towards keeping current systems running over innovating new value propositions – a clear barrier to needed investments in innovation and flexibility that SMBs crave.

Instead, payment firms should embrace composability which lets them select and assemble building blocks in various combinations to satisfy customer requirements. In doing so, firms can configure their offerings to best align with SME needs, powered by harmonized data, to deliver a unified value proposition by enabling payment firms to build B2B marketplaces for SMBs.

Explore new payment possibilities through Distributed Ledger Technology solutions

Distributed Ledger Technology (DLT) is emerging as a critical advantage for thriving in the age of seamless value exchange among the plethora of innovative technologies being adopted by banks to stay in the game. While many banks and payment service providers (PSPs) believe it has the potential to transform the industry, adoption will be cautiously steady as limited investment opportunities continue to be limited. The report depicts several potential paths forward as the market evolves and PSPs begin to investigate this new technology.

As B2B cross-border transactions on the blockchain continue to grow in tandem with cryptocurrency traction, 64 percent of SMBs believe DLT could emerge as a viable complementary option to existing payment networks. As a result, DLT can be considered as a part of a multi-rail foundation strategy to better support these global and regional payment networks.

Similarly, the rapid rise in the number of unregulated crypto assets has prompted many banks to investigate the opportunities presented by central bank digital currency (CBDC). Finally, the report emphasizes that those aspiring to be industry leaders are already scaling DLT use cases in anticipation of the next wave of growth opportunities.

Report Methodology

The World Payments Report 2022 draws on insights from two primary sources – the Global Small and Medium Business Survey 2022, which included 150 respondents, and the Global Banking and Payments Executive Surveys and Interviews 2022, which included 125 senior executives of leading banks. These primary research sources cover insights from 17 markets: Australia, Canada, France, Germany, Hong Kong, India, Italy, Japan, Malaysia, Netherlands, Singapore, Spain, Sweden, Switzerland, the UAE, the UK, and the United States.