Why back-office innovation is reinventing SME banking

This article is written by Arvind Vairavan of Finastra, in partnership with DigFin.

In the Asia-Pacific region, small- and medium-sized enterprises (SMEs) comprise more than 98 percentof all enterprises and contribute significantly to national GDP—ranging from around 17 percent in lower-income countries like India to 40–50 percent in more developed economies such as Malaysia and Singapore. Given their scale and economic impact, supporting SME growth through more efficient banking is not a niche issue.

For years, innovation in SME banking has been synonymous with sleek mobile apps, intuitive onboarding journeys, and frictionless user interfaces. And while these front-end improvements have undeniably enhanced the customer experience, they’ve done little to address the deeper infrastructure challenges that continue to hinder scalability, efficiency, and service quality in SME lending. It’s time to shift the innovation spotlight to where the real transformation is needed: the back office.

Hidden bottlenecks

Many of the persistent pain points in SME banking—delays in loan approvals, inconsistent servicing experiences, high error rates, and limited product flexibility—can be traced back to outdated and siloed back-office systems. These legacy infrastructures, often patched together over time, struggle to support the complexity and volume required to serve growing SME segments. While digital front ends create the illusion of modernization, core operations behind the scenes remain slow, manual, and error-prone.

This disconnect isn’t just a tech issue: it’s a business risk. SMEs are demanding faster access to credit, more personalised products, and consistent service across channels. Banks unable to deliver risk losing ground to fintechs with modern, integrated tech stacks. IBM research with the SME Finance Forum revealed a stark gap between what SMEs expect and what banks provide.

• Read more:
• Open finance – the path to more equitable banking
• PAObank races against time to build SME loan book
• DBS turns unsecured loans into trade finance for SMEs

While banks focus on transactions, risk, and internal productivity, SMEs are looking for trusted advisors—partners who can support business planning, provide market insights, and enable rapid access to funds. The root of this misalignment often lies in outdated, siloed back-office systems that can’t support the speed, flexibility, or personalization today’s SME customers expect. Closing this gap requires meaningful innovation in back-office lending operations—modernizing the core to deliver front-to-back agility.

This issue is especially pronounced in markets in South and Southeast Asia, where SMEs are increasingly turning to fintechs and niche providers that can meet these holistic needs, thereby gaining ground on traditional banks.

Scalable foundations

True scalability in SME banking hinges on modernizing the core systems that power the entire lending lifecycle, from origination and servicing to reporting and integrations. This means rethinking data management, automating manual processes, and enabling seamless interoperability across internal and external systems. It’s about building the infrastructure that allows front-end innovation to deliver on its promise.

At Finastra, we see this shift already underway. Our new Loan IQ Simplified Servicing solution is a case in point. Traditionally used by some of the world’s largest banks, Loan IQ now brings the same robust functionality to financial institutions servicing high-volume bilateral and SME loans, but with a streamlined interface optimized for ease of use. By automating previously manual servicing processes, the solution reduces operational risk, improves data accuracy, and shortens lead times—all critical enablers of SME lending at scale.

Toward integrated lending

Back-office innovation doesn’t stop at servicing. The most forward-looking banks are reimagining the entire lending journey as a connected, data-driven process. This includes real-time data synchronization across channels, API-first integrations with third-party services, and AI-driven insights that can enhance underwriting and portfolio management.

This is the type of holistic infrastructure overhaul the SME banking sector needs. Modern platforms like Loan IQ—evolving to meet the demands of smaller, high-volume lending—demonstrate what’s possible when we extend the innovation agenda beyond customer-facing touchpoints and into the operational heart of banking.

The strategic imperative for change

SMEs are an increasingly critical backbone of every modern economy. In APEC economies, SMEs represent over 97 percent of all businesses and employ more than half of the workforce. Yet the banking industry has struggled to serve them efficiently and profitably. To change that, financial institutions must look beyond the front-end and invest in the less visible, but equally critical, parts of their technology stack. Back-office modernization is no longer a support function—it’s the strategic foundation for scalable, future-ready SME banking.

Arvind Vaivaran is head of global solution consulting for corporate lending (Middle East, Africa, Asia-Pacific) at Finastra