Miranda McLean is Senior Director and Global Head of Marketing at Banking Circle and sits on the Executive Board of EWPN. In this article, Miranda shares with us the findings of the latest research report from Banking Circle, and the opportunities for improvement that it reveals within the financial industry.

With banks less able to serve SMEs than larger, more established businesses, we are at real risk of losing the vital economic contribution of these small businesses and start-ups. Banks are closing branches, taking away valuable local knowledge and business/bank relationships. Together with an increasing reliance on automated risk assessment technology, this is reducing SME access to banking services such as accounts, payments and lending. Reduced access is a dangerous spiral, keeping costs high and businesses excluded.

Financial inclusion

The topic of financial exclusion is usually associated with the underbanked or unbanked consumer population, often focusing on those living in the developing world. However, it also affects small businesses around the world. And don’t just think third world – it’s a first world problem too. Many smaller companies are unable to access financial services at a reasonable cost in a way that supports business success and growth.

Banking Circle research found that nearly two thirds (64.6%) of SME online merchants have needed extra finance in the past two years – excluding borrowing due to the COVID-19 crisis. Nearly a quarter (23%) needed the additional funding to cover payroll, and a further 26.5% to cover regular business costs. In a significant increase since the same survey was conducted in 2018, a quarter (26.4%) of respondents felt that without access to new cash they would be forced to let employees go; almost as many (24.4%) believe their business would ultimately fail if they were unable to access new finance. Yet the same number of businesses had to wait between three and four weeks to receive the vital cash they needed to cover essential costs.

Obtaining extra funding is a fact of life for many businesses, but our research highlights the serious gap in how easily and quickly funding can be obtained. This gap will have an even greater impact in the current climate as well as in the coming months and years of post-COVID recovery.

Despite SMEs making up 99% of all European businesses, employing two thirds of the region’s workforce, this sector is severely underserved by essential banking solutions. The good news is that changing regulations have allowed new entrants to provide alternative solutions, better able to meet the needs of today’s SMEs. For example, in its first four years, PayPal Working Capital provided £1 billion of finance to over 37,000 small businesses in the UK, and in the first 18 months after launching its lending solutions, Banking Circle provided more than £140 million in over 5,000 cash and loan advances.

Is it enough?

Today’s global economy means that whether a business is a Fortune 500 company or an SME, it must act as a global player. Lack of access to the necessary financial tools creates serious challenges in growing the business. For SMEs and start-ups to be in the best position to compete and prosper they need full and fair access to global scale financial services.

This starts with access to bank accounts – offering the ability to transact in the business’ local currency as well as the currencies of the countries in which they wish to trade. The ability to transfer funds into these other regions is essential – as is the availability of working capital to support growth.

Slow settlement cycles – especially through online marketplaces – can have a devastating impact on a business’ working capital, reducing its ability to restock rapidly, increase headcount, upgrade equipment or move to larger premises. Unable to advance and grow the business through these channels, SMEs stall, and many ultimately fail.

Fear of the unknown could be holding back SMEs from capitalising on the new solutions coming to market. AltFi reported that 51% of the 2,000 SMEs they surveyed would still approach a traditional bank in the first instance, if they needed additional funding. The figure has, in fact, increased since the previous survey a year earlier when 45% said they would approach a bank first.

The findings of the Banking Circle research, collated from the feedback of more than 1,500 European SMEs, revealed that loyalty to traditional banks could be fatal.

However, the AltFi survey also showed an encouraging annual increase in the number of SMEs considering using an alternative lender – up to 35% in 2019, from 30% in 2018. Maybe things are not so bleak after all.

Obstacles to access

Encouragingly, there is a growing commitment to improving access to commercial banking, transaction services and lending for SMEs across Europe. But there remains a multitude of issues at play, meaning 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 has been a barrier which has stopped many providers delivering effective and viable financial solutions at scale – neither existing corporate nor retail-focused offerings are suitable, so SMEs are left out in the cold.

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

The reality is that small businesses have specific requirements. Consumer products that try to attract SMEs, are often not agile enough and providers have little knowledge of small businesses. And the solutions developed for corporates are often too complicated and costly for SMEs.

Overcoming obstacles together

The current offering, or lack thereof, is perpetuating the difficulties for SMEs and in turn their higher-risk status from the point of view of the banks. To transform the current picture and replace exclusion with inclusion will require a more collaborative and creative approach. Financial institutions must work together 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 better placed to increase internationalisation and exports. This helps to support the diversification and resilience of the wider economy which in turn improves social integration and community cohesion. The significance of financial inclusion should not be underestimated.

The Enterprise Europe Network reported that 65% of small businesses expect to increase their turnover and 85% expect to be able to create or preserve jobs in the next year. However, these ambitious companies need financial services providers equally committed to innovation and growth. Despite the EU recognising the importance of financial inclusion and bringing in policies and programmes to help deliver better access to SME finance, many SMEs are yet to reap the benefits.

To move forward, 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 and businesses of all sizes and ages can benefit.

There are 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 participants, who can find and build accessible and inclusive solutions from the bottom up.

READ MORE: The full Banking Circle white papers are available to download here:

2018 report: ‘Financial inclusion for Europe’s SMEs: Building a Circle of Trust’ https://www.bankingcircle.com/whitepapers/financial-inclusion-sme-europe

2020 report: ‘Mind the Gap: How payments providers can fill a banking gap for online merchants’ https://www.bankingcircle.com/whitepapers/how-payments-providers-fill-finance-gap-online-merchants

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