Saving SMEs one payment at a time

Financial inclusion is at the heart of everything we do at Banking Circle, and our solutions are built to make the digital financial economy accessible to all. We can only be sure we are serving current business needs by continually talking to those in the industry who are facing the challenges and pain points day-in-day-out.

As such, we recently commissioned MagnaCarta Communications to carry out a series of studies into financial exclusion and how different financial institutions can each play a role in supporting SMEs and improving access to banking and finance solutions. In May 2019, we published a white paper, ‘Financial Inclusion for Europe’s SMEs: Building a Circle of Trust’, which we have now followed up with a Payments-focused insight paper, ‘Pay, Set, Match! Payment services for SMEs – Jump-starting a virtuous digital payment circle’.

Unique insights from experts working right in the heart of the payments sector provide up-to-the-minute feedback on the state of the industry, current provision, the challenges and what the road looks like up ahead. In gathering together and sharing this range of first-hand insights, we hope to encourage further industry-wide collaboration to find better solutions which meet the current needs of SMEs facing potentially lethal financial exclusion.

Serving SMEs: a unique challenge

Effectively serving SMEs requires payment service providers (PSPs) and other financial institutions (FIs) to have a true and meaningful understanding of the reality of small business life. Many PSPs are indeed SMEs themselves, which can be invaluable in assessing specific needs and the challenges SMEs might be facing. And this can put them in a strong position to develop solutions – working with like-minded partners – that exactly fit the bill.

However, PSPs must build SME-specific solutions, not adapt existing solutions built originally for larger businesses – that technique is one of the causes of SME financial exclusion today. Building specific solutions is not an easy task: each SME is entirely unique. Some are one-man-bands, others have 249 employees. Some are local businesses while others trade internationally. Some are seasonal and others have a steady flow of income throughout the year.

With businesses varying in almost every way, no single payment solution can meet all the financial needs of every SME. There is no one-size-fits-all solution. This immense variation creates a dilemma for financial institutions trying to build scalable solutions to meet SME requirements.

What all SMEs do have in common, however, is the need for banking services. Any business, any size, and industry, any target market and any turnover will need banking accounts. And almost all will, at some point, need an injection of cash, whether that is to kick-start an expansion, purchase stock at the beginning of the season or to replace broken equipment.

The reality is that a traditional business loan from a bank is generally too expensive, too inflexible and too slow to arrange, for a fast-paced SME in today’s highly competitive, digital and international marketplace.

Challenges for SMEs

As our research found, late payments, limited access to services and restricted credit lines are affecting the success and potential of SMEs of all sizes and stages. SMEs also commented that access to payment services is restricted, it takes too long to open a merchant account and there is little support for accounts payable.

Each of these can have a significant impact on an SME’s ability to maintain and grow its client base and profit margin. In turn, this limits its ability to expand, reach new markets, increase product lines and better serve its customers. With 24 million SMEs in Europe making up 99% of private businesses in the region, employing around 60% of the European workforce and contributing more than half of all business turnover, a problem holding back SMEs is a problem holding back the entire economy.

PSPs to the rescue?

Recent research showed nearly half of UK small businesses would be willing to move to a non-bank provider if their financial needs would be met in new and innovative ways.

The research conducted by MagnaCarta Communications showed that artificial intelligence is being used to reduce audit-processing times, automatically match payments to invoices, identify suppliers most likely to pay late and reduce fraud. Speeding up the process in this way reduces manual intervention, cuts the risk of manual errors and of course significantly reduces application, risk assessment and processing time. In turn, this brings down costs, delivering a more affordable and speedier process to better serve SMEs.

With many PSPs and other providers already delivering innovative ‘point’ solutions, and many ambitious SMEs currently underserved by their existing bank, the opportunity to build bridges and connect solutions is ready and waiting. Each provider has a role to play, and value to add, if they build relationships across the board.

As reported in our insight paper, financial inclusion based on digital technology occurs within a broad spectrum of technology, communication, collaboration and analytics. Innovation and real change are only possible within an ecosystem model where each player knows its own role and appreciates those of others.

Dialogues must be kept open, and innovation must continue, in order to find and develop successful, effective, affordable solutions, which will work for SMEs of all types, increasing financial inclusion and benefiting the wider, global economy.

Get a copy of the latest insight paper here.

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 efficient, cost-effective banking solutions. He was instrumental in arranging the acquisition of Banking Circle by EQT VIII and EQT Ventures.

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 helping financial institutions provide their customers with faster and cheaper banking solutions, including local and cross border payments, banking accounts and lending.