Financial inclusion for Europes SMEs: Building a circle of trust

What are the challenges of financial inclusion among SMEs? Alternatively, what are the barriers that finance providers face in supplying financial solutions at scale?

SMEs make up over 99% of all of Europe’s businesses and account for two thirds of all employment. They contribute more than half of all business turnover and generate more than half of all value added in the non-financial business sector - worth EUR 4,030 billion in 2016.

These businesses clearly represent a significant opportunity, yet many find themselves financially excluded. Indeed a recent Banking Circle survey of more than 500 SMEs revealed that without access to additional funding, 24.6% would have to cut employee numbers and 13.3% believe the business would fail.

With Europe’s SMEs covering every industry, with varying business models, distribution and ambitions, no two firms are alike. And this goes to the heart of the barriers to providing effective and viable financial solutions at scale.

Some lenders are ahead of the curve, already providing dedicated solutions to better-serve companies where traditional banks have been unable to help. But fear of the unknown could be holding back SMEs from capitalising on the new solutions coming onto the market. It was recently reported that 51% of SMEs 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.

But there is light at the end of the tunnel. The survey, which involved 2,000 SMEs, also showed an annual increase in the number of SMEs considering using an alternative lender – up to 35% in 2019, from 30% in 2018.

What is the major catalyst for change, but also the main challenge in the financial services sector?

In contributing to the Magna Carta research, Roger Vincent, Chief Innovation Officer at Trade Ledger recognised 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.” He believes – as we do at Banking Circle – that technology is a major catalyst for change in the financial services sector.

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 (SME Business Banking Opportunities Roundtable. Unisys, November 2018).

How should digital innovation and technology be used to solve financial inclusion problems, in particular for SMEs? What is the value that digital tools bring to a small business?

There is a growing commitment to improving access to commercial banking, transaction services and lending for SMEs across Europe. 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.

And it’s important to recognise that financial inclusion based on digital technologies is not an isolated process: it must take place within a broader narrative – one that connects 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.

Can you share some examples of work done to enhance financial access that has positively impacted SMEs? What is Banking Circle doing to solve financial inclusion problems?

Some lenders are ahead of the curve and already providing dedicated solutions to better-serve companies where traditional banks have been unable to help. For example, PayPal recently announced that it has provided GBP 1 billion of finance to over 37,000 small businesses in the UK since it launched PayPal Working Capital in 2014.

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.

Our commitment to understanding the challenges faced by SMEs is also illustrated through the research and insight we undertake on an on-going basis. For example, we recently commissioned Magna Carta Communications to carry out in-depth independent research to give us a unique insight into what is causing financial exclusion for SMEs – and the opportunities that exist for the financial services sector to improve financial inclusion. This has been published in a new white paper - Financial Inclusion for Europe’s SMEs: Building a circle of trust – which will be launched at Money20/20 Europe.

Do you see the regulatory environment/regional regulation as compatible with the goals of improving access to financial services for SMEs?

At policy-level, the EU recognises the importance of financial inclusion and has brought in programmes to help deliver better access to SME finance. However much of the existing information available on SME financial exclusion has a very narrow focus on lending and credit.

Just as consumer financial exclusion doesn’t just describe an individual’s inability to take out a bank loan, SME financial exclusion 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.

And 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.

In your opinion, whats the most important revolution to happen in the field of delivering financial services to small businesses in the next 3-5 years?

Digital innovation is the enabler for solutions. But the reality is that there needs to be a sea-change in how different providers work together. There are plenty of ambitious, but still underserved, small businesses with specific needs that could be met by an open, joined-up ecosystem. There are also plenty of potential providers of innovative ‘point’ solutions. But there remains a lack of connection between the two, apart from individual, often ad hoc collaborations.
We are now at a point for change, which, I believe can be built on collaborative models and solutions that can fit this diverse and disparate market. In turn, this should help build a larger marketplace from which providers old and new can benefit.

Banking Circle’s latest white paper - Financial Inclusion for Europe’s SMEs: Building a circle of trust - will be published at Money20/20 Europe. Click here to register for a copy available from 3rd June 2019.

About Anders la Cour

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 USD 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.