The chapter synthesizes extant interdisciplinary literature, by putting together a combination of relationship management theories as well as banking, economics, and finance theories, and blends this with findings from an ethnographic research platform to discuss the critical variables in the development of Bank-SME relationships. In addition, the chapter considers the effect of the recent economic crisis on the Bank-SME relationship. It can be seen that few banks looked inside their relationship with their SME customers as a means of redressing the crisis’ effect and this has detrimental effects on their long-term performance. As a consequence, the chapter proposes recommendations so as to reduce the crisis negative impact. Moreover, it highlights that the new developments in the technological environment, i.e. social media, can be used to strengthen the Bank-SME relationship’s success and is especially pertinent in such times of financial duress as it can enhance the communication mode of the dyad.
TopBackground
“The financing of Small and Medium Enterprises (SMEs) has attracted much attention in recent years” (de la Torre, et al., 2010, p. 2280). This is attributed to a number of reasons:
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SMEs represent the majority of firms in an economy (de la Torre, et al., 2010).
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SMEs are important customers that offer the greatest profit opportunity for banks (Zineldin, 1995).
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Most large companies start as small businesses (de la Torre, et al., 2010).
It therefore follows that banks should invest in building and enhancing the relationship with their SME customers. Such relational efforts would be largely driven by the acknowledgement of the benefits that accrue from relationship building; benefits which are well documented in the literature (Wilson, 1995; Christopher, et al., 2002). Even more so, banking is considered conducive to relationship development (Lovelock, et al., 1999) and relationship banking can yield considerable benefits for both the financial institution and the SME. It should therefore not be surprising that banks perceive SMEs as a core and strategic business and seem well positioned to expand their involvement with them (de la Torre, et al., 2010).
Specifically, financial institutions can reach a competitive advantage through relationship development since relationships ease the collection of customer information, but also by maximizing scale economies in goods and services that gather premium prices through faster reaching distribution channels, such as the social media, Internet, open source software, external networks, etc. In particular, the ease in collecting customer information is especially important since reliable information on SMEs is both rare and costly for banks and as such, relationship banking is often considered as the appropriate lending technique (Baas & Schrooten, 2005). This can in turn lead, on the one hand, to improved customer understanding and loyalty building, and on the other, a strong portfolio of SMEs can help in achieving scale and scope economies, ultimately enhancing long-term profitability (Reichheld & Sasser, 1990).