Small and medium-sized enterprises (SMEs) located in China’s Greater Bay Area (GBA) are set for the next phase of growth and are showing growing appetite for financial services, according to new research by Bain & Company.

Launched today, the report Greater Bay Area SME Report: A Story of Resilience and Opportunity is an analysis of surveys and focus groups from over 460 SMEs in the GBA, with contribution from Hang Seng Bank.

With 87 million permanent residents and a GDP of $US1.9 trillion in 2021, the GBA is one of the world’s biggest economies, similar in size to that of Canada or South Korea. Although the pandemic and geopolitical tensions have dampened SMEs’ short-term prospects for the region, they remain confident about long-term potential.

SMEs are optimistic about long-term economic growth and government policies

Over two-thirds of SMEs expect long-term economic growth to be similar to or stronger than the region’s historical growth. These SMEs are ready to invest in the GBA. About 80% of mainland SMEs and 60% of Hong Kong SMEs surveyed expect to invest 15% or more of their annual revenues this year.

Local governments in the region are also committed to developing the GBA into a world-class technology, innovation, and e-commerce hub. Over the past two years, there have been policies launched to promote interconnectivity within the region.

“SMEs in the GBA are highly positive of the economic outlook and they are eager to grow. About 70% of both Mainland and Hong Kong SMEs surveyed are optimistic about the government’s interconnectedness policies, and about 80% would like the government’s initiatives to be implemented faster,” said Frankie Leung, a partner with Bain & Company’s Financial Services practice in Hong Kong. “However, SMEs need help to expand, in particular, support from financial institutions from both mainland China and Hong Kong, tailored cross-boundary financial products, and convenient delivery models.”

SMEs in the GBA have substantial financial service needs, as they prepare for the next phase of growth. They need support from financial service providers for the expansion, including more convenient lending, professional wealth management services, flexible insurance policies, and comprehensive cash and liquidity management. For financial service providers, this is an important opportunity to capitalize on.

Many SMEs surveyed are underbanked

The report shows high demand for funds, but many SMEs are underbanked. About 60% of mainland SMEs and 35% of Hong Kong SMEs need to secure over 40% of the funds they need for domestic investments and operations in the next three years. However, the ability to secure loans within the GBA is a major concern.

“SMEs need loans to meet their domestic funding needs, but they struggle with the application process. Innovations, such as using alternative data in credit assessments, can help alleviate pain points,” said Herbert Lee, a Hong-Kong based partner with Bain & Company’s Financial Services practice.

Strong demand for cross-boundary financial products and GBA expansion

Notably, SMEs are eager to expand within GBA, and they show great interest in cross-boundary financial products. About half of mainland SMEs said they are likely to expand into Hong Kong or Macau, and nearly 75% of Hong Kong SMEs expect to expand into China Mainland.

Retail investors in the GBA also identify strongly with cross-boundary financial services needs, particularly among affluent families and retirement planners. Interconnectivity within the region supported by leisure, work and retirement travel is the driving force, according to preliminary results of the upcoming report Greater Bay Area Retail Report: How to Enable Cross-Border Lifestyles with Financial Services.

“As restrictions ease, expansion plans could increase. Financial service providers can provide cross-boundary financial products and services tailored to customers’ specific needs. For instance, by simplifying the processes of applying, buying and using, and creating cross-boundary and multi-channel experiences for different customers,” said Dr. Wenting Zhao, an associate partner of Bain & Company in Shanghai.

Financial institutions need to consider three key areas to succeed

Financial service providers can use this opportunity to grow alongside SMEs in the GBA. To do that, financial service providers need to focus on three key areas:

1、Clearly define how the GBA will factor into their future portfolios. Cross-boundary plans can be niche by design – or financial institutions can enter into full-scale competition against domestic providers. For example, GBA banks with existing international networks could start by building financial connectivity between China and the rest of the world, especially through supply chain or accounts receivables financing.

2、Evaluate industries in the GBA based on their potential financial services needs—and ability to serve them. Financial institutions need to understand their target industry’s unique challenges and preferences to build attractive offerings and win business. For example, technology SMEs often need loan products with low collateral requirements and longer repayment schedules. Financial institutions looking to win in this sector need deep technical knowledge to properly issue credit assessments. Direct knowledge and experience in the industry is necessary to understand how products are being developed, their potential for commercialization, and risk.

3、Develop a nuanced understanding of cross-border consumers. A foreign approach will not win local business. By giving voices from both sides equal opportunity to share their experiences, financial institutions can learn how to adapt products, services, terms, or channels to attract cross-border customers.