Saturday, June 15, 2024

EXCLUSIVE: “Winning the hearts, minds and finances of SMEs” – James Tall in ‘The Fintech Magazine’

James Tall analyses the state of banking for the majority of the world’s businesses and finds them hungry for better service

Small and medium-sized enterprises (SMEs) form the backbone of every economy. They make up some 90 per cent of businesses worldwide and employ more than half of the global workforce. According to the World Bank, they also contribute up to 40 per cent of GDP in emerging economies. In short, they are vital.If we look at the UK, SMEs comprise more than 99 per cent of the country’s businesses. They employ nearly 13 million people and have a collective turnover of more than £1trillion. If they can’t grow, then neither can the wider economy.

It’s therefore a concern that they are experiencing extremely tough times. Rising costs, interest rates and energy bills may be squeezing family finances in the UK and beyond, but the effects on small businesses are even more pronounced. Hard-pressed SMEs have to contend with all of these issues, but also the significant knock-on effects – rapidly-shrinking consumer demand, reduced footfall and the rising costs of goods and materials. It’s no surprise that recent research by Mastercard revealed more than two-thirds (69 per cent) of small business owners in the UK believe there is a ‘cost of doing business’ crisis running in tandem with the much-publicised cost-of-living crisis. Worryingly, 37 per cent say their annual turnover has fallen since the start of 2022.


SMEs certainly have their work cut out. Whether it’s securing funds to launch and scale their business, weathering global crises like the COVID-19 pandemic and the accompanying supply chain chaos, or growing through a cost-of-living crisis, times are hard.Against this volatile backdrop, small business owners also have to contend with the fact they have been underserved by banks and other mainstream financial institutions for years. SME lending has decreased significantly and now accounts for just two per cent of overall bank balance sheets in the UK. According to a report by Cloud banking platform Mambu, in association with consultancy EY, a lack of understanding and limited data history make it harder for banks to grasp how best to service SMEs. This leads to high-risk profiling and is one of the main challenges SMEs face.

The Mambu and EY report, Unlocking Big Growth In Small Businesses: How To Drive SME Lending Transformation Through Product Innovation, goes on to identify a number of crucial elements that financial institutions, regardless of their shape or size, should consider in order to ensure their lending offerings are accessible to SMEs. These include building deeper customer relationships and understanding – SMEs are very different to one another and can’t be as easily categorised as retail customers.

A more thorough understanding of SMEs, and their particular circumstances, enables better risk management and unlocks new opportunities. Building lending services around a Cloud-native and composable platform, meanwhile, will allow a lender to enjoy the easy combination of best-in-market components providing flexibility and longevity.

“SMEs have a lot of challenges. You need to build a bank that gets those challenges – so their accounting is sorted, their payroll is sorted, their expenses are sorted,” says Kunal Galav, global head of partnership development at composable core banking provider Mambu. “It’s almost as though banking becomes invisible for them.”


Given the agility required to efficiently service SMEs, it’s unsurprising that challenger banks and other fintechs have stepped up to the plate. OakNorth Bank, for example, is exclusively for business lending and savings and its focus on this underserved sector propelled it to become the first digital challenger bank unicorn in the UK in 2017. But five years later, Capgemini Research Institute’s World Payments Report 2022 found SMEs are commonly struggling with cash flow issues, cybersecurity risks, poor liquidity and operational inefficiencies.

These factors are fuelling their existing discontent with incumbent banks, and 89 per cent of those surveyed are considering a shift to a more accommodating alternative fintech challenger. Mambu’s own research of global SMEs found 35 per cent of SMEs that are open to switching lenders would do so for better digital services, rising to more than half (52 per cent) among the largest SMEs.“What small businesses really need is a bank that understands them,

One that is actually willing to get under the skin of what makes their business different from every other business out there,” agrees Conrad Ford, chief product officer of Allica Bank, which was granted a UK banking licence in 2019 and exclusively serves SMEs, which are generally determined as having between 10 and 250 employees.

Within its first three years, it had leant £1billion to businesses, attracted more than £1.5billion of savings and become one of the fastest UK fintechs to turn a profit, as well as winning a clutch of awards.In payments, in particular, the B2B value chain has often been neglected. Whilst traditional banks have adopted innovative new digital payment methods for consumers, many fail to provide the same support for SMEs. According to the Capgemini Research Institute, SMEs are demanding that payment service providers step up, realign their priorities and assemble the right tools to help them explore new opportunities.

“More than two-thirds of small business owners in the UK believe there is a ‘cost of doing business’ crisis… 37 per cent say their annual turnover has fallen since the start of 2022”

The report found more than a quarter of banks struggle with monolithic and inflexible infrastructures, with 75 per cent of executives prioritising current systems over innovating new value propositions. To win back the business, and loyalty, of small businesses, incumbent banks will have to amplify platform value, which can only be unlocked by tackling restrictive legacy systems that are stifling growth. If they embrace composability, which allows them to select and assemble building blocks in various combinations to satisfy customer requirements, argues Mambu, they can configure their offerings to better align with the needs of modern SMEs.

Simon Hammerschmidt, the company’s global head of strategic partnerships, says agility and speed of decisioning are key.

“Try, and fail fast, rather than waiting for perfection,” he says. “The whole point about agile is that you try things, you iterate, you do proofs of concept, you see if they work, and if they don’t work, you then move and pivot to something else, versus the old waterfall method, which was requirements gathering, six to 12 months to actually implement something, by which time the market has changed.

“Mambu is the only true composable ecosystem-based solution, which allows our clients and our customers that flexibility in pulling together the right solution for them. We work with systems integrators and consultancies who build ecosystems around Mambu, who can swap components in and out. Think of it as Lego bricks; you can build what you like with it. Our competitors are probably more like a jigsaw; ultimately, there’s still only a finite picture you can build, and you have to put the slots in the right place.

“We’re also the only true SaaS provider out there, which means that when we make a change to our product for one client, it’s for all of the 250-plus of our clients, they all get the benefits from that.”


The Deloitte And Mambu Guide To Buy Now, Pay Later believes it’s a convenient, fast and democratic product that promises to unlock revenue for both banks and retailers. Many SMEs are turning to the short-term credit solution, which they increasingly see as an important element in their financial armoury. As much as it’s a payment feature that more and more of their customers are demanding, it’s also becoming a useful supply chain feature. Whilst B2C BNPL faces increasing regulatory scrutiny in an effort to protect consumers from debt bubbles, many believe the B2B BNPL model is set for growth in 2023.

Testament to this is the fact Amazon looks to be leaving its options open when it comes to BNPL service provision, letting an exclusivity commitment with Affirm expire in February.The growing popularity of the B2B BNPL model for SMEs is due to the fact it facilitates third-party credit and risk management tools that can improve cashflow flexibility for businesses by accelerating credit approval while mitigating repayment risk. It’s essentially collateral-free, short-term credit that can help to solve the critical problem of access to supply chain finance.

“The current situation is interesting,” says Ingmar Stupp, founder of Tilta, which has built an embedded lending infrastructure for B2B e-commerce. “Businesses will run low on liquidity, interest rates are rising, and they are looking for alternative forms of receiving working capital.”

B2B BNPL offers potential to scale, and advantages for both buyers and sellers. Buyers can more conveniently repay in instalments, while sellers receive payment upfront. B2B BNPL also typically increases sellers’ average order value and boosts sales conversion rates. Seller risk is reduced as third parties handle credit evaluation.

The BNPL market will be key for both banks and fintechs this year as they battle for the hearts and minds of SMEs. Incumbent banks have the regulatory expertise and access to low-cost capital, as well as customer data that can simplify credit evaluation. Fintechs, meanwhile, have the envied ability to streamline both onboarding and underwriting.

Ultimately, banks realise they need to offer B2B BNPL products to stay relevant to SMEs. It naturally follows that incumbents and fintechs are now partnering to leverage this trend. For example, Deutsche Bank and Credi2, an Austrian provider of digital financing solutions, have jointly launched a white-label BNPL solution for merchants.

This is an exciting new arena to watch as the relationship between banks and fintechs continues to evolve. And it can only be good news for beleaguered SMEs.


This article was published in The Fintech Magazine Issue 27, Page 52-53

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