Big changes ahead for small business banking

Anders la Cour, Cofounder and Chief Executive Officer of Banking Circle looks at the challenges and opportunities ahead for fintechs serving SMEs

SME is a term that covers an incredible range of businesses, from one-man bands to chains with more than 200 employees; local businesses or companies trading internationally and seasonal pop-up shops, to permanent local favourites.

What they do have in common, however, is that they all need access to banking solutions. In addition, most will – at some point – need an injection of cash to jump start an expansion, purchase seasonal stock or replace broken equipment.

The problem is, with the businesses varying so dramatically in almost every way, no single traditional banking solution can possibly meet the financial needs of every one of them. There is no one-size-fits-all solution.

It’s not just banks that are finding it difficult to serve SMEs effectively. Compared with the number of retail banking providers, few fintech or challenger bank solutions cater specifically or successfully for the needs of SMEs, either. The result is that SMEs are often caught between retail and corporate banking offerings, with neither meeting their specific requirements.

Cost is also a major issue for smaller firms. Interest rates may be relatively low today, but charges, fees, commissions and collateral requirements for lending continue to rise. Such financial exclusion is not just an inconvenience – it can have a catastrophic effect on a business.

Seeking solutions

We recently commissioned MagnaCarta Communications to carry out research into these issues, which were published in our June 2019 white paper, Financial Inclusion For Europe’s SMEs: Building A Circle Of Trust. We have now commissioned a further study, which will be published at Sibos 2019.

Having interviewed some of the people working right in the midst of the challenges, we have been able to gather firsthand, expert insights and experiences. Our hope is that this will help us find a
way towards better financial inclusion for businesses of all sizes, stages and models.

The additional research appears in a mini-paper we have called Circle Of Trust Or Out Of The Loop?. The report uncovers where changes are happening, where opportunities exist, and where barriers are beginning to come down to increase SME financial inclusion. It paints an inspiring and exciting picture of the future of SME banking.

What the experts said

David Selves, Founder of The Selves Group, summed up the two main problems. Firstly, delays caused by card payment clearing, and secondly: “You can’t go and natter with your bank manager, you can’t explain to someone who knows you and your business that the transaction is approved and the money is on its way but just hasn’t cleared. Automated systems will turn down applications or reject direct debits because the funds are not in the account.”

Kent Vorland, CEO of SmartTrade App, explained why this is such a serious issue: “Smaller merchants tend to have normal people problems. They need their money so that they can complete the jobs or orders for their customers, or to purchase stock for the customer who has ordered it. If they don’t have access to the finance they have legitimately earned, they might not be able to feed their family.”

Roger Vincent, General Manager (UK&I) & CIO of Trade Ledger, was among those who agreed that some categories of SMEs are better served than others. He  commented: “Above a turnover of £1million, banks will flick businesses over to corporate banking from retail, and that’s the gap where companies are massively underserved.

SMEs are the driving force behind the UK economy. If we don’t start to tackle the problem of financial exclusion, we will be a long way behind the curve against other industries or other countries which are tackling the problem and stimulating growth within their countries.”

Patty Zuidhoek, Director of Business Banking at Triodos Bank, highlighted the difficulties faced by banks, with the European Central Bank enforcing more stringent gatekeeping requirements: “All these checks and balances can be discouraging. A lot of large banks withdrew from SMEs because they want to take a standardised approach, which doesn’t work in this sector.”

Paul Townsend, Non-exec Director of Vitesse PSP, confirmed: “There are certain client groups where a bank is perfectly acceptable and works well. Where it becomes more challenging is when the client becomes more complex, requiring foreign exchange and cross-border payments, having a small balance sheet and low number of employees. This brings concerns around cost-to-serve.”

Broadening the SME banking horizon

Although most alternative banking solutions in the market today cater for  consumers, there is increasing provision targeted at SMEs. Valentina Kristensen, Director of Growth and Communications at OakNorth bank, said: “SMEs are still not top of the agenda for most financial services providers, but many are waking up to the benefits. They are realising that if they get an SME on board, they will be loyal and bring multiple cross-selling opportunities within the business, amongst the business owners, and there is potential for employees to become profitable retail customers too.”

As our report shows, bringing about real change and better financial inclusion for SMEs requires not only top-down directives from state authorities, but more of a grassroots movement. This requires participants to work together and develop joint solutions, building bridges between individual innovations already in the market.

Roger Vincent of Trade Ledger added: “We are creating a new ecosystem of financial services providers, in partnership with other entities, such as Banking Circle, to establish a new era of financial services that will better serve  customers and SMEs. If we better serve the banking space through the incumbents, then the SMEs will benefit greatly as they will be able to access the services they want. In this new ecosystem, we can provide a new environment to better serve SME
financial services.”

Banks are also recognising the potential of the ecosystem model and are facing a choice between two strategic moves. They can build their own ecosystem platforms, or they can design interoperable services and solutions to be distributed through other ecosystems. Either way, we are seeing a distinct shift away from exclusive relationships in favour of a more shared approach. Undoubtedly, banks must be involved in the conversation about the way forward – they are perfectly placed to lead on areas of strength and build collaborative solutions to fit this diverse sector, working together to help build a larger marketplace from which everyone benefits.

What’s next?

Kent Vorland of SmartTrade App believes the market is more than ready for a better SME funding solution.

“One hundred per cent of the merchants I have worked with over the past three years would be overjoyed, thrilled, to have access to their cash instantly, and would willingly pay a small fee or interest on the loan, or a certain percentage of all transactions, to pay back a settlement or loan they needed,” he says. Not only that, but he believes the solution could be delivered now.

“I can assure you, every financial institution on earth could put together a risk structure that would allow these companies to have access to that finance. And, on top of that, all insurance companies in the world would be happy to insure those liabilities, so the risk wouldn’t necessarily even lie with those offering that financial inclusion. All in all, there is a long line of companies that would benefit from being given that level of flexibility.”

However, as our latest report shows, the progress and achievements will remain limited until further collaboration, communication and joined-up thinking becomes commonplace within the financial services industry.

As David Selves, of The Selves Group, commented, the potential is huge: “A bank which took the bull by the horns and really went in to support SMEs would clean up.”

■ To register for the new Banking Circle Insight Paper, which will be launched at Sibos 2019, go to www.bankingcircle.com/whitepapers