Small and medium-sized enterprises (SMEs) have served as the backbone of the global economy for centuries, and yet, these vital organisations are often the first to feel the repercussions during a financial crisis.
In the United Kingdom, according to the Federation of Small Businesses (FSB), SMEs account for 99.9 percent of businesses, making up three-fifths of employment and around half of the turnover in the private sector alone. And yet, these organisations are still feeling the repercussions of the 2008 global financial crisis (GFC), whereby major lenders restricted access to credit in an effort to de-risk their balance sheets. This has led to far-reaching consequences for thousands of businesses—particularly in markets around the world in which SMEs are heavily dependent on bank funding to grow.
The COVID-19 pandemic has—unsurprisingly—made things much, much worse, forcing companies to scramble in order to stay afloat. The change has been seismic, with businesses switching to online operations, repositioning their offerings, moving workforces to remote environments and, in some cases, furloughing staff or even shutting down for good.
For those businesses operating across multiple markets via exports, the physical restrictions caused by lockdown rules have been catastrophic. Short-term government relief, in the form of grants and loans, has been very welcome, but such support is not indefinite, particularly as governments seek to rebalance their books in the coming months.
When the pandemic first hit, governments around the world urged banks to offer generous lending to assist with the crisis. Often, these schemes were administered by large lenders, which entered the crisis with stronger capital and liquidity levels than they had 15 years ago. But banks soon reverted to pre-pandemic policies, which included stricter lending rules for smaller businesses and limited access to Tier 1 banking services, particularly for start-ups and SMEs in emerging markets.
Worldwide, banks’ online systems have struggled to support the significant influx of business-account applications. The need for support, loans and government schemes inevitably surged at the height of the pandemic, and traditional banks’ legacy IT (information technology) systems and outdated processes were not equipped to deal with such a swell in demand for their services.
In the UK, 130,000 applications were received on the day the Bounce Back Loan Scheme (BBLS) was introduced, and cracks in banks’ lending infrastructure started to show from the outset. The turnaround-time promise of “just a few days” for processing these applications turned out to be false, with nearly one in four businesses waiting more than a month for a response. This delay compounded the problems for many struggling businesses that were already on the verge of collapse.
Predictably, start-ups and small businesses were some of the worst impacted by the delays and problems caused by banks’ lacklustre lending and support initiatives. In October 2020, small-business owners and start-up entrepreneurs specifically expressed concern1 about the difficulty of simply opening a bank account.
As a result, challenger banks and fintechs (financial-technology firms) have entered the business-banking space, becoming increasingly popular amongst companies, particularly SMEs. Such banks, including Starling Bank, Monzo and Tide, offer a purely digital customer experience, with the infrastructure and technology in place to handle the demand increase. As a result, the HM Treasury and British Bankers’ Association (BBA) expanded the list of accredited lenders for the Bounce Back scheme to include fintechs and alternative lenders.
The trend in digital banking is indicative of a global transition to technology-led services, in which the banking industry has lagged behind other sectors for many years. However, despite the impressive streamlined processes delivered by fintech companies, many organisations fail to provide critical tailored services, and many crucial requests for credit and financial support are declined.
Evidence of a return to the old ways
Not only outdated technology and limited lending capital have adversely affected SMEs throughout the pandemic; traditional banks have continued to demonstrate their favour towards larger businesses all over the world.
In Australia, a recent report2 indicated that a shortfall of $120 billion existed for smaller businesses and start-ups. In the United States, large banks such as Bank of America and JPMorgan Chase actually limited loans to customers and credit-card holders only, cutting off thousands of struggling business owners in desperate need of capital support. And in the UK, reports of “credit score” and “credit check” biases came into play.
Overseas, in emerging markets (EMs), the situation is far worse. Predictably, it is very difficult for a small-business owner in a developing country to access Tier 1 banking services when the banks themselves are struggling to fulfil this obligation in the countries in which they are headquartered.
SMEs in emerging markets have already witnessed excessive culling of Tier 1 banking-services options since the financial crisis, and, as a result, the demand to access international payment rails and foreign currency to make local payments continues to outstrip the current supply sources—leaving EMs with costly and unstable “indirect” access that isn’t scalable. Additionally, due to the lack of direct connectivity to external banking systems across much of Africa, Latin America and Asia, the availability of international services is expensive and restrictive.
Moreover, in the wake of the continued success of the vaccination rollout across the world, we can be optimistic that our battle with COVID-19 is finally coming to an end. But without the government-mandated initiatives and schemes in place, small-business owners and businesses in emerging markets can expect traditional lenders to cut their products and services to pre-pandemic levels.
Whilst the pandemic has brought unprecedented hardships, it should also bring about much-needed change in the wider banking industry. No longer can big banks use the 2008 crash as an excuse to starve ambitious companies of access to the financial support they need. Likewise, banks need to ensure they have the correct partnerships in place with on-the-ground providers who can connect them to fast-growing companies in need of support.
Obtaining access to credit and payments support is critical for the majority of businesses seeking to survive and thrive in the post-COVID economy. The time has come for Tier 1 banking services to be accessible to companies of all sizes, not just reserved for larger, more established companies.
The solution is to work with specialist fintech organisations that can combine speedy online services with actual consultancy and advice to ensure the best products are purchased and delivered. For SMEs desperate to reboot following the devastation of the pandemic, an exciting new opportunity awaits.
1 BBC: “Covid: Small businesses’ account delays are over, insist banks,” Kevin Peachey, May 28, 2021.
2 SmartCompany: “Big banks are neglecting $120 billion need for SME lending, Judo Bank warns,” Stephanie Palmer-Derrien, July 26, 2021.