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Solving the SME Banking Conundrum

In many developed countries around the world, it’s widely acknowledged that SMEs are the backbone of the economy. In the UK, they account for nearly two-thirds of total employment and almost half (53%) of turnover in the private sector to the sum of £2.4 trillion.

At the same time, it’s also notoriously difficult to access finance as a small business owner. According to the British Chamber of Commerce, 49% of the businesses they surveyed felt that getting funding had become more challenging over the past three years. A Novuna Business Cash Flow survey found that 28% of SMEs have experienced rejection when applying for financial support since November 2023.

Given the myriad other pressures and economic headwinds businesses have faced in recent years, it’s an unfortunate situation and one that banks would undoubtedly like to rectify. The challenge is making it profitable to do so. Chief Revenue Officer for Corporate Lending at Finastra, Lekshmi Nair, understands these challenges and feels there may be something technology companies like theirs can do.

“SMEs face a lot of challenges post-COVID,” says Nair. “Coming out of that crisis there have been rising costs for energy and commodities and of course increased interest rates. There are also struggles finding the right talent and managing supply chains within the current geopolitical situation. On top of it all, there’s an ever-changing regulatory and tax burden as well.”

“We also recognise the challenges faced when looking for financing. Given the lending protocols that businesses need to go through during onboarding, it’s sometimes the case that they don’t have the right documentation covering their credit history and future credit worthiness to fit financers’ requirements.”

But there is also a pre-existing hesitancy from traditional lenders to service this type of customer. Whilst the desire is there, Nair says, and “they understand the important role that SMEs play in the economy and also the communities they serve”, SME lending is often not the most profitable part of their business.

“Part of the problem is the onboarding process from the banks’ side. The antiquated platforms and processes that are still in place today are burdensome. SMEs may also require a very tailored approach to their financing, and they can’t always take off the shelf products. To provide a more effective service, relationship managers really need to build a level of understanding of SME requirements.”

To answer the need, new challengers have moved in to fill the gap. “It’s not always the traditional banks that are providing financing. There are now many platforms that have opened up for SME financing outside of the traditional bank.” The increased popularity of these agile platforms, and their ability to quickly service this segment, may point to where some of the solutions lie.

“We’re delivering APIs that provide seamless and smart integration enabling efficiency for clients”

Lekshmi Nair, Chief Revenue Officer for Corporate Lending, Finastra

Enhanced automation and even developments in Open Finance could present a way for banks to streamline their processes and offer services to a wider range of clients. Finastra has a lot of expertise here, but the motivation is not just servicing a need. It fits with their broader vision too.

“We are a deeply purpose-driven organisation. Financial inclusion and enabling access to finance is important for us, which is how we look at Open Finance. Being a global organisation, we have a diverse perspective and a broad range of personal journeys. Even in our own lives, we understand the importance of finance for our families and communities. Inclusion is a key part of it. Everything we do around technology is about putting ourselves in the shoes of our clients and our clients’ clients.”

As for the solutions they offer to the specific problem of financing SMEs, Nair says they “don’t have a silver bullet to fix all these issues” but their approach, which involves taking the mindset of those small businesses, as well thinking about what the banks are doing, means they have a good understanding of the solution.

“The work and investment that we’re doing with Loan IQ, which has traditionally been used for complex lending, a high margin business, is now focused on the simplification and the servicing of bilateral and SME loans. For banks this means creating a more streamlined UI/UX so they can automate this process, creating fewer touch points and requiring less manual intervention within operations. This lowers the cost to serve and ensures we have the capability for a higher volume of loans on our platforms.”

Another issue is around interoperability. It’s another industry buzzword but it’s brought up a lot for a reason and that is the widespread issue of legacy banking systems. “Most banks will have proprietary platforms from a range of vendors and a lot of cost and efficiency is lost in pulling these platforms together. Often this means staff will key in the same information multiple times in different platforms as a loan is processed.”

“In response, we’ve been very focused on the openness of our platform and delivering APIs that provide a seamless and smart integration to enable our clients to drive efficiency, hopefully reducing operational risk getting them to a decision about a client’s loan much faster and driving a more seamless onboarding process.”

They may not have a silver bullet, but along with their research and development into AI and how it impacts both “the client and the colleague journey”, increasing speed to market and reducing the cost to serve and operational risk, they’re clearly focused on creating platforms that works for everyone in the chain.

Speaking to Nair, we also wanted to know what she thought of the upcoming Sibos 2024, hosted in Beijing for the first time, and what it means to Finastra.

“Sibos is a key event for Finastra, and all of our business units are represented at the event. It’s a wonderful opportunity for us to connect with our clients, partners and prospects. We want to ensure we remain relevant, that we continue to deliver value to our clients and remain ahead of the curve on innovation.”

Of course, one of the major points of interest about this year’s event is the location. It’s a focus for Finastra and it ought to be for many in financial services given the Indo-Crescent region is poised for further growth and, according to McKinsey’s Global Banking Review, is home to over half of the world’s top-performing financial institutions.

“In terms of the location, this is a very dynamic region undergoing tremendous changes, and we see markets like Japan really opening up. Close collaboration with our clients and partners will ultimately ensure success.” It’s clear to see how this also links with their work on bolstering SME banking, given this market is ripe with opportunity. In South-East Asia particularly, SMEs account for 97% of all businesses in the region and employ 67% of the working population. As in many parts of the world, serving them is an imperative that until recently has not been easy to meet. Now, with the help of technology, that might improve.”

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Companies In This Post

  1. SME Lender iwoca Secures New £200m Funding Led by Citi – Increasing Investment in the Business to Almost £1.5bn Read more
  2. Akuna Wallet Unlocks the Digital Economy for African Creatives Read more
  3. Magic Labs Unveils Newton, the First Chain Unification Network, Connecting Leading Wallet Solutions to the AggLayer Read more
  4. Tencent Leverages Cutting-Edge Technology and Partnerships to Lead a New Era of FinTech Innovation Read more
  5. Centralis Group Continues Its Planned Growth Strategy, Acquiring the Business of Admina Fund Services Read more
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