Circle of trust

It’s no secret that SMEs struggle to access credit. But innovative financial utility Banking Circle wanted to know why and what impact financial exclusion had. So, it asked them… and concluded that a new approach was needed

Every company was once a startup, an SME, a financial unknown and high-risk investment opportunity. For some, growth has taken many decades of prudent business decisions and gradual expansion.

However, in the much faster-paced markets of the last few decades, the ability to grow has gained a greater sense of urgency. And to support that fast-paced growth, investment is needed from the outset.

For some enterprises, this might come from family and friends, and then from forward-thinking venture capitalists. But for others, if early cash injections cannot be secured, they could well become one of the high proportion of startups that fail within their first four years of trading. This makes financial exclusion for SMEs an increasing – and very real – concern for the global economy.

Companies of all sizes, but especially the smaller, younger firms, can be held back from meeting their full potential by difficulties with payments and cashflow. Transfers can be too slow and expensive, and without access to additional funds many SMEs struggle and potentially fail. Traditional banks are unable to provide flexible, fast and low-cost solutions.

Identifying this issue as a key ‘pain point’ for SMEs – but also an opportunity for the financial institutions servicing this sector – groundbreaking financial utility Banking Circle recently commissioned Magna Carta Communications to carry out in-depth, independent research. The aim of the study was to provide a unique insight into what is causing financial exclusion for SMEs and
the opportunities that exist for the financial services sector to improve the situation.

The current landscape

There are more than 24 million SMEs in Europe; they make up more than 99 per cent of all the region’s businesses and account for two-thirds of all employment. They contribute more than half of all business turnover and generate more than half of all value added in the non-financial business sector – worth €4,030billion in 2016. These businesses clearly represent a significant opportunity, yet many find themselves financially excluded.

Some lenders are ahead of the curve and already providing dedicated solutions to better serve companies where traditional banks have been unable to help. For example, PayPal recently announced that it has provided £1billion of finance to more than 37,000 small businesses in the UK since it launched PayPal Working Capital in 2014.

However, it seems that fear of the unknown could be holding back SMEs from capitalising on the new solutions coming onto the market. A Growth Street survey of 2,000 SMEs recently reported that 51 per cent would still approach a traditional bank in the first instance if they needed additional funding. The figure has, in fact, increased since its previous survey a year earlier when 45 per cent said they would approach a bank for lending first.

The recent Banking Circle survey of more than 500 SMEs revealed that, without access to additional funding, 24.6 per cent would have to cut employee numbers and 13.3 per cent believe the business would fail. Therefore, this loyalty to traditional banks – despite SMEs confirming their lack of satisfaction with the service delivered and costs incurred – is questionable.

But there is some good news. The earlier Growth Street survey also showed an annual increase in the number of SMEs considering using an alternative lender – up to 35 per cent in 2019, from 30 per cent in 2018.

Collaboration is missing

There is a growing commitment to improving access to commercial banking, transaction services and lending for SMEs across Europe. But the multitude of issues at play means there is no one-provider-fits-all solution.

With Europe’s SMEs covering every industry, with varying business models, distribution and ambitions, no two firms are alike. This creates a barrier to providing effective and viable financial solutions at scale – neither existing corporate or retail-focussed offerings are suitable, so SMEs are left out in the cold.

There are plenty of ambitious, but still underserved, businesses with specific needs that could be met by an open, joined-up ecosystem. There are also plenty of potential providers of innovative ‘point’ solutions. But there remains a lack of connection between the two, apart from individual, often ad hoc collaborations. The bigger picture of a connected ecosystem is often obscured by a virtual tidal wave of statistics, audits and promotions.

The reality is that small businesses have specific requirements. Consumer banking products that try to appeal to SMEs are often not agile. And the solutions developed for corporates are often too complicated for SMEs.

A collaborative approach

Without access to suitable solutions, SMEs find themselves facing high prices and other barriers to entry, which
are stunting growth and limiting the appeal of SMEs to prospective lenders – it is a vicious circle of self-reinforcing inaccessibility. What’s needed is a more collaborative and creative approach to build a mutually supportive ecosystem in which SMEs can thrive and improve their contribution to the economy.

SMEs with access to suitable financial solutions are also better-placed to increase internationalisation and exports. This helps to support the diversification of the wider economy which, in turn, improves social integration and community cohesion. So, the significance of financial inclusion for SMEs should not be underestimated.

The Enterprise Europe Network recently reported that 65 per cent of small businesses expect to increase their turnover and 85 per cent expect to create or preserve jobs in the next year. These ambitious companies need financial services providers equally committed to innovation and growth. Yet, despite the European Union recognising the importance of financial inclusion and bringing in policies and programmes to help deliver better access to SME finance, many still can’t reap the benefits.

The financial services sector is at an inflection point. To move forward, Banking Circle believes all ecosystem participants must continue the conversation and work together to build collaborative models and solutions that can fit this diverse and disparate market. If they can, it will help build a larger marketplace from which providers old and new can benefit.

There is clear evidence of the significant gains to be made by all participants. But, rather than relying on top-down directives from state institutions, this needs to be led by forward-thinking organisations that can build accessible, inclusive solutions from the bottom up.

Banking Circle has built solutions to help businesses of all sizes compete and prosper. The suite of innovative Banking Circle solutions is increasing financial inclusion by providing previously excluded businesses with access to essential lending, banking accounts and cross-border payments.

■ The full report, Financial Inclusion For Europe’s SMEs: Building A Circle Of Trust, will be published at Money20/20 Europe. To register for a copy, available to download from June 3, 2019, visit https://www.bankingcircle.com/pre-register-for-our-upcoming-white-paper-financial-inclusion-for-europes-smes-building-a-circle-of-trust.

This article was published in The Fintech Finance Magazine: Issue #12, Page 62.