Cover Story: Banking Circle
A collaborative financial ecosystem can break down barriers to SME success
Every company was once a start-up, an SME, a financial unknown and high-risk investment opportunity. For some, growth has taken many decades of prudent business decisions and gradual expansion. Think, for example about Johnson & Johnson, started in the 1880s, selling the first ready-to-use surgical dressings, and expanded steadily into new markets, boosted over the years by company acquisitions and partnerships as well as post-WWII demand for better surgical solutions and pharmaceutical medicines.
However, in the much faster paced markets of the last few decades, the ability to grow has gained a much greater sense of urgency. And to support that fast paced growth, investment is needed from the outset. For some enterprises, this might come from family and friends, and then from forward-thinking venture capitalists. But for others, if early cash injections cannot be secured they could well become one of the high proportions of start-ups that fail within their first four years of trading.
Whilst slow-and-steady growth can work for some companies, as it did for Johnson & Johnson, in today’s instant, connected, global market, speed is critical to get ahead, deliver innovative solutions at the right time and to remain competitive. The problem is financial solutions do not always serve SMEs well and, post-recession, banks are less able to lend to smaller, seemingly higher-risk businesses. This often leaves them unable to build or deliver their solutions and meet their potential ahead of the competition. SMEs are becoming increasingly financially excluded.
There are more than 24 million SMEs in Europe, making up more than 99% of the region’s businesses, and accounting for two thirds of employment. As such, SMEs represent a significant opportunity, and their collapse would cause significant damage to the economy.
Banking Circle recently commissioned Magna Carta Communications to carry out independent research into financial inclusion for SMEs, to uncover the views and experiences of businesses, fintechs and banks today. It also identifies the opportunities that exist for those organisations supporting the sector – banks, PSPs, fintechs and other financial services institutions. The research confirmed that there is no one single reason why firms are excluded from financial services, therefore it’s hard to identify a one-size-fits-all solution to creating financial inclusion.
From vicious circle to virtuous circle
With Europe’s SMEs covering every industry, with varying business models, distribution and ambitions, no two firms are alike. This creates a barrier to providing effective and viable financial solutions at scale – neither existing corporate banking nor retail-focused offerings are suitable, so SMEs are left out in the cold.
Speaking to MagnaCarta, Ivo Gueorguiev, Chairman of Paynetics, an infrastructure payments provider to fintechs and smaller players, commented: “[SMEs are] dispersed, there’s no data available on them, and therefore it’s expensive to reach out to them. For this reason, they’re either underserved or the products they are being offered are offshoots from products developed for corporates and thus often unsuitable.”
Without access to suitable solutions, SMEs find themselves facing high prices and other barriers to entry which are stunting growth and limiting the appeal of SMEs to prospective lenders – it is a vicious circle of self-reinforcing inaccessibility.
Thankfully, digital innovation and Europe-wide regulation are putting pressure on financial services providers for greater collaboration to build bridges. This will help transform the current vicious circles into virtuous circles of provision, availability and use, creating a mutually supportive ecosystem in which SMEs can thrive.
Value of financial inclusion
At policy-level, the EU recognises the importance of financial inclusion, and has brought in programmes to help deliver better access to SME finance. Financial inclusion has a positive effect on many areas of a business as well as the wider economy. For example, it enables more sustainable and efficient business growth, skills development, job creation and innovation in product and service development.
SMEs with access to suitable financial solutions are also increasing internationalisation and exports and supporting the diversification and resilience of the wider economy. In turn this improves social integration and community cohesion. The importance, significance and impact of financial inclusion should not, therefore, be underestimated.
Improving financial access to improve financial inclusion
The European Commission’s flagship report, the Survey on the Access to Finance of Enterprises (SAFE), paints a relatively rosy picture of financial access for euro-area SMEs. On average, businesses taking part in the survey ranked access to finance in the lowest position on the scale of major business challenges.
The proportion of firms claiming access to finance was their major challenge has halved since SAFE was first conducted in 2009, and SMEs’ ability to access bank lending has improved every year between 2012 and 2017. The EIB’s Investment Survey shows that bank loans account for almost 70% of external SME funding, and approval rates for bank loans have increased steadily since 2014.
There has also been a slight but notable upward trend in both the need for and availability of bank loans and credit lines. However, the European Parliament is still cautious. Despite progress in the availability of loans, guarantees and venture capital, it says that the financial markets often fail to provide SMEs with the financing they need, and access to finance is still the second-largest problem faced by individual SMEs.
According to SAFE, bank lending alone is not meeting the needs or requirements of almost half of Europe’s small businesses. While SMEs report improvements in access to finance and interest rates have fallen, charges, fees and commissions remain high, and overall SMEs report increases in collateral requirements.
Lending alone doesn’t solve financial exclusion
Much of the existing information available on SME financial inclusion has a very narrow focus on lending and credit. But, just as consumer financial inclusion doesn’t just describe an individual’s ability to take out a bank loan, SME financial inclusion is not just about lending. This narrow view ignores business-critical access to bank accounts, payment services and foreign transfers, as well as issues caused by slow merchant account opening, and the lack of support for essentials such as accounts payable.
Alex Park, Director of Digital at UK challenger bank, Metro Bank, believes smaller firms are suffering due to established banks focusing primarily on retail and larger commercial customers. He commented: “SMEs are being underserved … For example, you can open a bank account in less than a day, as a consumer, but it still takes 15-20 days to open a SME account.”
Patty Zuidhoek, Director of Business Banking at the Dutch Triodos Bank, which focuses on sustainable and ethical banking, agrees: “The European Central Bank wants us all to stretch further and further in gatekeeping - in other words, to be stricter and lower risk. All these checks and balances can be discouraging, and a lot of large banks withdrew from SMEs because they want to take a standardised approach which doesn't work in this sector.”
Ivo Gueorguiev of Paynetics, says that because SMEs are notoriously hard to reach they are rarely a major part of a bank or financial institution’s strategy. Payment products are therefore usually priced-up with the obvious cost implications: “There are very few value-added products available: usually products for SMEs are the very basic banking or payment services. That hinders the SMEs’ ability to offer more attractive products to their clients, improve their efficiency, increase profitability and ultimately, reinvest in the business.”
Faster cash, not more cash
During the research, a recurring issue was raised by the interviewees: speed. Speed of decisions, speed of settlement, speed of delivering funds. David Selves, entrepreneur and owner of the Selves Group of Companies, explained: “The main difference between banks in the past and now is that banks don’t know their customers or their businesses in the same way. It takes too long for them to make decisions such as for business loans. Three to five banking days for card payments is still the norm, which causes considerable issues for many small businesses who need to restock rapidly.”
Michael Ault, CEO of Universal Transaction Processing agrees: “One of the most common complaints we hear from SMEs is the time it takes to get funded. They’ve already been through an arduous process to get a merchant services account, and then it takes days to get their funds. In today’s tech-enabled world, they want faster processing within an hour of taking a transaction.”
Kent Vorland, CEO of the SmartTrade App, which has created a platform for micro-businesses and sole traders, is clear that “… small businesses – especially micro-businesses – have specific requirements. We’ve seen consumer products try to attract SMEs, but they are not agile enough and have little knowledge of small businesses. On the other hand, the big boys have complicated functionalities, but nothing optimised for small merchants who often don’t have software knowledge and skills needed.”
Technology and ecosystem collaboration
Less than half of EU states have so far established a one-stop-shop to support SMEs in accessing funds, strongly suggesting that a broad and effective ecosystem for SMEs is still a way off.
Roger Vincent, Chief Innovation Officer at Trade Ledger recognises the lack of interoperability and collaboration in the financial services sector. He believes “… this has essentially resulted in an explosion of new commercialised 'islands of digital innovation', created by financial service companies each vying for the custom of SMEs by holding them captive in their 'spheres of influence'. Technology is a major catalyst for change in the financial services sector, and I would certainly say that it's starting to have an impact on how SMEs are serviced by their banks.”
The challenge is to make sure that technology is also a catalyst that can kick-start greater collaboration. In the UK, arguably one of the most advanced markets for financial technology, two in five small businesses regularly experience technological problems when accessing accounts online. As a result, nearly half said they would move to a non-bank provider – providing their banking needs could be met in new and innovative ways.
There is a growing commitment to improving access to commercial banking, transaction services and lending for SMEs across Europe. There are plenty of ambitious, but still underserved, businesses with specific needs that could be met by an open, joined-up ecosystem. There are plenty of potential providers of innovative ‘point’ solutions. But there remains a lack of connection between the two, apart from individual, often ad hoc series of collaborations. The bigger picture of a connected ecosystem – a circle of trust – is often obscured by a virtual tidal wave of statistics, audits and promotions.
However, financial inclusion based on digital technologies is not an isolated process: it must take place within a broader narrative – one that connects banking solutions to technology to communications and collaboration strategies, as well as to analytics. And even to wider society.
To move forward, all ecosystem participants must continue the conversation with each other, 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 old and new can benefit. Rather than relying on top-down directives from state institutions, this needs to be a circular, grass-roots movement, led by participants, who can find solutions from the bottom-up.
Leading the rise of a super-correspondent banking network, Banking Circle is helping financial institutions increase financial inclusion by providing their customers with faster, cheaper banking solutions, including banking accounts, local and cross border payments and lending, without the need to build their own infrastructure and correspondent banking partner network.
The full report, Financial Inclusion for Europe’s SMEs: Building a circle of trust, will be launched at Money20/20 Europe. Click here to register for a copy, available from 3rd June 2019.
Co-Founder and Chief Executive Officer of Banking Circle, Anders la Cour is a hands-on leader driving innovation to facilitate more inclusive, efficient and cost-effective banking, lending, payments and FX. He was also instrumental in arranging the $300 million acquisition of Banking Circle by EQT VIII and EQT Ventures in 2018.
About Banking Circle
Next-generation provider of mission-critical banking infrastructure, Banking Circle, is underpinning the service proposition of Financial Tech businesses, PSPs, FX providers and banks. Banking Circle is increasing financial inclusion, helping financial institutions provide their customers with faster and cheaper banking solutions, including local and cross border payments, banking accounts and lending.