How technology is changing SME banking
For the past decade, there has been much discussion around the fact that FinTech disruptors will one day completely take over the core functions provided by banks. In some niche areas, this is already happening, especially when looking at the adoption of B2C and P2P money transfer and payment services, budgeting and financial planning, and investment platforms.
It’s not just consumers. According to EY, globally, 25% of SMEs are using some form of FinTech, with 93% of adopters focusing on the technological solutions on offer when choosing a partner.
However, while it may not seem it, incumbent banks are actually in the strongest position to deliver solutions that meet the current and future banking needs of SMEs.
Why SMEs are heavily excluded from the financial ecosystem
Business banking is complex, and even more so for SMEs because they vary so much in size, industry, and location. For this reason, the options available to SMEs vary dramatically, and yet, very few are suitable. With no two SMEs alike, banks find themselves unable to provide SMEs with the flexible, fast-paced banking solutions they really need to help them thrive.
Technology is beginning to change that. But to bring about better financial inclusion for SMEs, those in the financial services ecosystem need to work together and develop joint solutions, collaborating to build bridges between individual innovations already in the market, which are currently siloed.
Access to bank accounts and payment solutions
Today’s global economy means that no matter how large or small a business is, it must act as a global player. Being able to reach international markets begins with international banking capabilities. Cross border businesses must be able to access bank accounts that provide the ability to transact in the business’ local currency as well as the currencies of each of the countries in which they hope to trade.
Unfortunately, SMEs may struggle to open bank accounts that can provide global banking services, and when they can, the setup process is long, the costs are high, settlement times are slow and FX rates are poor. This can have a serious impact on profits and cause damaging issues with cash flow.
So how can banks help? One way is to offer SME clients Banking Circle Virtual IBAN accounts. Working with a financial infrastructure provider, Banks and Payments businesses can issue virtual IBAN accounts in their customers’ own names and across multiple jurisdictions, increasing the ease, speed, and clarity of payments, and facilitating internal reconciliation. Because the solution has been designed for the sole function of simplifying global payments, banks are able to reduce the time taken during the onboarding process, while providing a global bank account solution to SMEs at a lower cost, as no ongoing resources need to be allocated in order to maintain the banking relationship.
Access to lending
Another area where banks are failing to meet the needs and expectations of SMEs is lending. Newer companies, online merchants, those who operate a seasonal business that has peaks and troughs in revenue, and marketplace sellers who are affected by slow settlement cycles are most likely to be unable to access loans from their bank.
The main issues here are speed and inflexibility of lending criteria. Every SME is different.
Thanks to proprietary algorithms, it’s now possible to make a decision on a loan in less than 24 hours of receiving the application, and the SME will then receive the funds in their account within the next 24 hours, if approved. These decisions are made not just on whether or not a business falls into a high-risk category – they are based on historical transaction data, which gives a much better picture of whether a business is eligible for a loan. The average wait for a loan from a bank in the UK for a small business is 60 to 80 days – a long time to wait, especially if you then find that your application has been rejected and you must start the process again, with another bank.
When it comes to flexibility, bank loans have a fixed payment amount to be paid each month, whether it has been a good month for revenue or not. A far better way of lending to SMEs is to allow the business to pay the loan back based on a percentage of their turnover. This way, when things are busy, they’ll pay more; when it’s quiet, they’ll pay less.
Payments businesses and Banks can use this technology to make faster, more tailored loan offers to SMEs, without an increase in risk on their part.
Access to technology through collaboration
For smaller businesses to be able to keep up with their larger counterparts, they need to restock rapidly and serve markets outside of their local jurisdiction. This requires working capital, which in turn demands faster and cheaper payment processing. To deliver this, financial services providers need to start working together more closely, and banks can play a huge part in improving SME banking if they are willing to collaborate to deliver technology-driven solutions.