How SMEs Can Benefit From Bounce-Back Banking

The current downturn is having a devastating and potentially fatal impact on small and medium-sized enterprises. But there are steps financial institutions can take to add value to the experience they deliver to the businesses known as ‘the backbone’ of most economies. Here, Anders la Cour, CEO, Banking Circle, examines the insights delivered by the company’s latest white paper.

Across Europe, small and medium-sized enterprises (SMEs) account for two-thirds of all employment and more than half of all gross value added (GVA). But the Covid-induced economic slump is affecting SMEs disproportionately, with 90% reporting a drop in turnover as a consequence of the pandemic.

Aiming to fully understand challenges facing these particular businesses – and identify the opportunities for the financial services sector to support an SME bounce-back – financial infrastructure provider Banking Circle commissioned a new white paper entitled Bounce-back Banking: 5 markers for success in delivering SME financial services. 

The difficulties SMEs face in accessing suitable and affordable banking, payments and lending solutions is nothing new. The brightest and hungriest firms have for many years faced this challenge. But factor in a global pandemic that forced thousands of those businesses to shut down for weeks or months at a time bringing cashflow to a standstill overnight, the picture grows bleaker still. Add to that a second nationwide lockdown in the lead-up to Christmas, the busiest season for many organisations, and it is hard to predict how the future will look for SMEs.

With little cash left in the accounts and government support not always going far enough, SMEs need additional funding to pay rent, utility bills and payroll, not to mention ordering stock so that they can kick-start cash flow. They also need payment and foreign exchange services that are cost-effective. However, unable to provide a long credit history or report consistent revenue, many SMEs are finding that their usual bank can’t help, leaving them unable to gain access to the services they need.

Indeed, our latest research, which investigated the attitudes of SME business leaders across Europe, revealed a significant gap between what they need and the quality of advice and service they receive. Since new regulations and tougher restrictions came into play after the last global recession, banks have found it more difficult to offer financial services to smaller businesses. And the wide range of business models, distribution and ambitions means no two firms are alike, which only adds to that challenge.

SMEs out in the cold

In other words, there is no one-size-fits-all SME banking solution, and banks don’t have the flexibility or resources necessary to offer suitable, affordable solutions. Neither existing corporate nor retail-focused offerings are suitable, so SMEs are left out in the cold. Our research found that nine out of 10 SMEs are happy with core account services, but almost one in four experiences customer service issues with their bank.

With trade for many SMEs dramatically and unexpectedly lower in 2020 than in previous years, these challenges are amplified. For example, one in five (22%) of the SMEs we spoke to waited up to two months for loan application responses, with 25% waiting up to a month. Alongside high fees (42%), SMEs said poor-quality service and low responsiveness reduced their confidence in their bank. However, only 27% of banks believed there has been an erosion of bank customers’ trust in recent years.

When banks first came into existence, market requirements were very different; no one could have imagined the cross-border, digital, international trading landscape in which we find ourselves today. The once-pioneering systems and in-house servers on which banks are built now present a significant challenge in deploying new software and applying best practices.

In research conducted earlier this year, half of the banks surveyed said the move to digital services was a major challenge, yet two-thirds believe they are keeping pace with technological change. However, smaller companies are turning to alternative providers for faster, cheaper solutions; almost half (48%) of SMEs have looked elsewhere for banking solutions that better suit their needs.

A future-proofed vision

European banks have often claimed SMEs are expensive to service and their needs too diverse. But our latest report includes examples of providers that are already getting it right. It also sets out concrete areas where financial institutions can adopt new approaches to support small companies for a profitable, sustainable future in the next normal – post Covid-19 – without the need for significant investment.

Where incumbent banks are built upon monolithic legacy systems, fintechs are built in the cloud. They are flexible, nimble, more able to adapt quickly and launch new solutions to meet the rapidly evolving needs of smaller businesses. We, and other fintechs like us, are building systems designed from the basic understanding, that technology is ever-evolving and what was the norm today, may need replacement or an upgrade tomorrow.

In the past, banks often had the mentality that they could do everything in-house. But those that tried to overhaul their legacy infrastructure to deliver new solutions found it too difficult. That mindset has now shifted. Banks are increasingly open to collaboration to deliver the best solutions.

In the white paper, we have identified five key areas where changes could be made to improve relationships and service delivery between SMEs and financial services providers.

Service

SMEs are happy with a digital delivery model, but it should offer more bespoke services, lower cost and improved responsiveness – available through digital platforms and partnering with service providers.

Pricing

SME choice isn’t always about the price. Financial services providers should think flexibly. Innovative – and tailored – approaches to pricing could help them improve SME services and enhance profitability.

Credit and risk management

Banks should try to address the inequity SMEs can face when seeking credit compared with big companies through better risk-scoring systems. Interoperable application programming interfaces (APIs) now make it possible to access SMEs’ financial information directly.

Trust

To win SME trust, banks should seek to combine digital delivery with tiered, personalised services and the human touch, a view endorsed by Kent Vorland, CEO, SimplyPayMe, UK, who said: “There seem to be very few tailored features or services for the SME market. By focusing more on the customer and their pain points, and less on procedural box ticking, a lot more could be achieved.”

Advice

Quality advice is key to serving the SME market effectively. Starting from the digital platform and partnership model, financial services providers can take things further, adding a layer of personalised advice via email and/or voice to the mix.

Selma Kveim, CEO, Bright Products, Norway, told us: “Companies like ours are willing to pay for better advice. The only place we can go for advice is our auditors – but they’re not financial product specialists. There’s huge potential for banks to make SME advice a paid-for service.”

Banking in 2021 and beyond

SME needs are indeed extremely diverse. Ultimately, achieving total financial inclusion for SMEs requires a joined-up ecosystem where various financial services providers connect their solutions. Making these connections will be vital for global economies as we look to recover from the worst health crisis in a century and one of the biggest economic shocks in history.

Partnering with specialist providers within the financial ecosystem in a platform or white-label arrangement reduces costs and enables tailored services through existing banks’ digital channels. Our research found that 80% of retail banks and 74% of commercial banks have already worked with infrastructure providers.

Financial infrastructure providers such as Banking Circle are focused on developing the technology to process payments directly, and to integrate to a vast network of local clearing and payments schemes. Using decoupled architecture, we can update or replace individual pieces of architecture with limited impact on the rest – meaning we can quickly add more functionality and work within new geographies. This means we are able to give financial services providers the ability to support their business customers with faster and cheaper cross-border banking solutions.

As we all know, SMEs are vital – so much so that they are often referred to as ‘the backbone of the economy’ in many countries, and rightly so. In the EU alone, there are more than 22.2 million SMEs in the non-financial business economy, making up more than 99% of the region’s businesses. But poor access to payments, lending and bank accounts is putting these precious businesses at serious risk – today more than ever before. Providers of all types need to make changes so they can serve smaller businesses better.