Promoting financial inclusion for SMEs

Efma feature

25 May 2020

Anders la Cour, CEO at Banking Circle, spoke with Efma’s Boris Plantier about the evolving SME banking landscape during the coronavirus crisis.


Why are SMEs unsatisfied with banking offers?

There is a growing gap between what SMEs actually want and need, and what banks are providing. As a result, SMEs’ ability to innovate and grow is being hampered. While formal directives are focused on improving access to funding, the momentum is lacking in relation to the broader suite of financial services. Many traditional institutions, for example, remain adverse to providing merchant accounts to sole traders; and access to payments services remains poor. At the same time, SMEs are reporting growing problems with terms and conditions of their financing. Interest rates have, on balance, declined, but charges, fees and commissions remain high, and collateral requirements are increasing. This all contributes to the overarching feeling that SMEs are being underserved.

What is the impact of the COVID-19 crisis on European SMEs?

The OECD states that the economic crisis brought on by the COVID-19 pandemic has impacted SMEs more than the 2008 financial crisis. In fact, they’ve warned that there’s a serious risk that over 50% of SMEs will not survive the next few months. Although the exact effects of the crisis cannot be known for some months, in France, the governor of Banque de France anticipates a fall in IGP of at least 8%.

For now, a banking loan granted by the French state has allowed companies to access 187M€ in funding as of April 20th, half of which is specifically reserved for SMEs. But having highlighted the financial inclusion issues facing France’s small businesses, there’s a pressing need for financial organizations to focus on creating lending (and other financial) solutions aimed specifically at the needs and challenges of these organizations. For example, by giving businesses the flexibility to repay more or less depending on their cash flow. Something that will help SMEs get back on their feet and readjust to the new normal more quickly and efficiently.

Is there room for challenger banks and new players in SME banking?

SMEs represent 99% of businesses in the EU and contribute more than half of all business turnover. Yet, the European parliament itself states that the financial industry often fails to provide SMEs with the funding they need. This triggers a vicious cycle, as SMEs that lack the finances to invest in digital tools needed to remain competitive in the digital economy face stalled growth and – in turn – restricted access to funds. In this context, there is a lot of room for challenger banks and new players to address the specific and often varying needs of SMEs. More importantly, because there is no single solution or provider that can address the financial issues being faced by SMEs, there’s an opportunity for these new players to focus on creating an open, joined up ecosystem that meets the unique requirements of various SMEs.

And from the bank's point of view, can the SME segment be served profitably?

With around 3 million SMEs in France alone, the opportunity for banks to serve them is significant. But, in order to do so profitably, they need to focus on delivering excellent and innovative customer service. Something that can be achieved by collaborating with financial infrastructure players who have the technological capability to deliver core banking services more effectively and cost efficiently. This frees up time and resources for the bank which can be spent focusing on profitably growing the customer relationship.

What should be done to help European SMEs to face this crisis?

The government and banks are doing their best to support SMEs through the current pandemic. But beyond the immediate crisis, we think that this should be a wake-up call for governments and businesses to start taking the issue of financial inclusion for SMEs more seriously. And we hope that it will lead to the development of new innovative financial services created specifically with the needs of SMEs in mind. As mentioned before, ensuring that payment options on a loan are more flexible could, for example, help SMEs get back to business more quickly as the lockdown is lifted as they can repay more or less depending on their cash flow. And that’s just one way in which SMEs financial needs can be catered to more specifically, but there are a number of other pain points, challenges and opportunities that should be uncovered and addressed.

What is this circle of trust you suggest to create?

Because there is not just one issue to be solved for SMEs, there’s no single provider that can meet their challenges. While there are plenty of providers of innovative ‘point solutions’, there’s a lack of connection between the two. Ultimately, achieving true financial inclusion for SMEs requires a joined-up ecosystem, where various financial providers connect their solutions.

Is access to credit the only SME need when it comes to financial inclusion?

Access to credit is only one of the numerous challenges that SMEs are facing right now. Just as critical to SME survival and growth are essentials such as access to payment services or foreign transfers, the time it takes to open a merchant account or support for accounts payable. Some of the problems SMEs face in this area include slow payments, limited access to efficient transaction services and restricted credit lines. In addition, our research of SMEs also found that there are very few value-added products available for SMEs, which ultimately hinders their ability to improve their efficiency, profitability, and offer more attractive products to their clients.

Could we really talk about financial exclusion for the SMEs in Europe?

Yes, I think so. Even though there’s not a standard definition of what constitutes financial exclusion, the fact that the European Commission talks about support for SMEs demonstrates the clear need for more tailored financial services.

Download Banking Circle's Financial Inclusion for European SMEs

Keywords : SME/Corporate , Bank Products & Services

Geography : Europe