Banking on an ecosystem to help post-COVID SME bounce-back

Banks across Europe often claim small­er busi­ness­es are too expen­sive to ser­vice and their needs too diverse. Yet small and medi­um-sized enter­pris­es (SMEs) are the back­bone of Europe’s econ­o­my. They rep­re­sent 99 per cent of all busi­ness­es in the Euro­pean Union and employ 67 per cent of the work­force.

Despite rep­re­sent­ing a sig­nif­i­cant and prof­itable oppor­tu­ni­ty, SMEs face finan­cial exclu­sion that leaves them unable to com­pete with big­ger play­ers. Lack of access to afford­able bank­ing solu­tions lim­its SMEs’ poten­tial and ham­pers their growth. In turn, because SMEs play an impor­tant role in economies around the world, this exclu­sion has a neg­a­tive impact glob­al­ly.

Finding the right prescription

SMEs strug­gling to access suit­able and afford­able bank­ing is noth­ing new. The bright­est and hun­gri­est firms have, for many years, faced this chal­lenge. But when you fac­tor in the coro­n­avirus pan­dem­ic, which is forc­ing thou­sands of those busi­ness­es to shut down for weeks or months at a time, bring­ing cash flow to a stand­still overnight, more than once with­in a year, the pic­ture grows bleak­er still.

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 for antic­i­pat­ed cus­tomer demand. They also need cost-effec­tive pay­ment and for­eign exchange ser­vices. How­ev­er, unable to pro­vide a long cred­it his­to­ry or report con­sis­tent rev­enue, many SMEs find their usu­al bank can’t help and they are left unable to gain access to the ser­vices they need.

With the aim of explor­ing the spe­cif­ic chal­lenges fac­ing SMEs and iden­ti­fy­ing the oppor­tu­ni­ties for the finan­cial ser­vices sec­tor to sup­port a post-COVID SME bounce-back, Bank­ing Cir­cle com­mis­sioned a new white paper, Bounce-back Bank­ing: Five mark­ers for suc­cess in deliv­er­ing SME finan­cial ser­vices.

The research revealed a sig­nif­i­cant gap between SME needs 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. The wide range of busi­ness mod­els, dis­tri­b­u­tion and ambi­tions also means no two firms are alike, mak­ing them dif­fi­cult for banks to serve. The result is SMEs are left out in the cold.

As a con­se­quence, some Euro­pean SMEs have been turn­ing away from banks in cer­tain ser­vice areas and more could fol­low. To rem­e­dy this sit­u­a­tion, banks should think cre­ative­ly about ser­vice pro­vi­sion, espe­cial­ly in areas like cross bor­der pay­ments and for­eign exchange. Part­ner­ing with spe­cial­ist providers reduces cost and enables tai­lored ser­vices through exist­ing banks’ dig­i­tal chan­nels.

As the Bank­ing Cir­cle white paper explains, mon­ey trans­fer com­pa­nies have grown rapid­ly by offer­ing cheap­er, faster trans­ac­tions; oth­ers have expe­ri­enced rapid growth for their lend­ing solu­tions. Now, as estab­lished insti­tu­tions utilise their cus­tomer rela­tion­ships, brand trust, liq­uid­i­ty and clear­ing capa­bil­i­ties to hit back, they are work­ing with finan­cial infra­struc­ture providers such as Bank­ing Cir­cle to be able to offer bank­ing solu­tions that bet­ter serve SMEs, while main­tain­ing prof­itabil­i­ty.

Preparing for the bounce-back

When banks first start­ed, mar­ket require­ments were very dif­fer­ent, and no one could have imag­ined the

cross bor­der, dig­i­tal, inter­na­tion­al trad­ing land­scape in which we cur­rent­ly find our­selves. 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.

Fifty per cent of banks told us in the research we con­duct­ed ear­li­er this year that the move to dig­i­tal ser­vices is 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 per cent) of SMEs have looked else­where for bank­ing solu­tions that bet­ter suit their needs.

Future-proof vision

No sin­gle provider can suc­cess­ful­ly meet the diverse needs of the entire SME com­mu­ni­ty. Ulti­mate­ly, achiev­ing total finan­cial inclu­sion for SMEs requires a joined-up ecosys­tem, where var­i­ous finan­cial providers con­nect their solu­tions. Mak­ing these con­nec­tions will be of vital impor­tance to 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 reduces cost and enables tai­lored ser­vices through exist­ing banks’ dig­i­tal chan­nels. Our research found 80 per cent of retail banks and 74 per cent 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 with a vast net­work of local clear­ing and pay­ments schemes. Using decou­pled archi­tec­ture, we can eas­i­ly update or replace indi­vid­ual pieces of archi­tec­ture with lim­it­ed impact on the rest, so we can quick­ly add more func­tion­al­i­ty and work with­in new geo­gra­phies.

This means we are unique­ly placed to give banks and pay­ment busi­ness­es the abil­i­ty to pro­vide their busi­ness cus­tomers with faster and cheap­er cross bor­der bank­ing solu­tions.

Inad­e­quate access to cross bor­der pay­ments, for­eign exchange and bank accounts is putting pre­cious SMEs at seri­ous risk more than ever before. Providers of all types need to make changes so they can pro­vide bet­ter solu­tions for small­er busi­ness­es.

To find out more about how finan­cial ser­vices providers can improve their ser­vice for SMEs, down­load the white paper at bankingcircle.com

Pro­mot­ed by

Bank­ing Cir­cle