By Philippe Werner, Managing Director, Stanhope Financial Group
Small and medium sized enterprises are the lifeblood of the global economy, yet for too long these dynamic businesses have found themselves restricted access to the tier one banking services enjoyed by larger, more established organisations. Following the 2008 crash and the chaos of the global pandemic, an unhealthy culture has developed amongst the big banks whereby it is now all too easy to blacklist an SME, refusing them core banking services and justifying the decision due to fears of risk. The OECD even revealed that this tightening of credit condition was clearly evident for all banks’ clients, particularly SMEs, and the European Central Bank also confirmed this was the case, citing poor SME economic prospects, increased cost of capital and a desire to rebuild bank balance sheets, as reason for the global SME slighting.
This knee-jerk approach has not only left many ambitious companies without the services they need to thrive, but it also means that many banks will miss out on the opportunity of working with and supporting the next generation of high growth companies.
Whilst nobody is saying that risk assessment isn’t essential, it shouldn’t be used as a mechanism to prevent legitimate companies from getting the support they deserve. The consequences of this trend have been negative to say the least, with many businesses struggling to stay afloat, confused as to why the critical services available to their larger rivals are completely out of reach to them.
One of the biggest casualties of this ‘banking cull’ has been businesses in developing countries and crucial emerging markets. The facts speak for themselves, with economic growth declining by 6.8% across emerging and developing economies from 2008 to 2009, which is more than the mean total of all advanced economies combined during this period.
The pandemic forced many banks to take action and start offering services to businesses of all shapes and sizes, usually at the behest of the government. Loans, financial support and advice became available for a very short period, with these schemes rolled back now that lockdown restrictions have been lifted.
The sad fact is that, for many companies seeking access to high quality financial services from Tier 1 Banks, from payments to FX, is that basic banking infrastructure simply is not easily accessible anymore.
The 2008 crash was so long ago, and now even the challenges of Covid have largely been overcome, and yet these core financial products & services for SMEs show no sign of being accessible, even when the global economy had stabilised. This is because tier one banks have traditionally prioritised the higher ticket income from large corporates and multinationals, rather than the SME companies. Essentially, this means the SMEs are being neglected, as servicing them is perceived to take too much effort, all for lower returns.
On a macro-level, lack of financial access for SMEs has a profound effect on the global, and local, economies. In the EU, for example, there are around 23 million SMEs, employing around 100 million Europeans. It can be safely said that SME’s play a vital role in economies.
Furthermore, there is considerable opportunity for banks in investing in emerging markets. Around the world, almost two billion people have never held a banking account, and over the next decade it is predicted that 40 million new bank accounts will be opened in China and 15 million new accounts will be opened in Nigeria. This growth in demand for access to financial services offers a huge opportunity for banks to capture new customer relationships at an early age and take advantage of a financial world which is progressively moving toward internet and tech-infused banking.
What’s more, in the wake of Covid-19, nearly every advanced nation is looking to drive innovation to boost their economy and accelerate long-term industry success. However, without funding for exciting startups, entrepreneurs and world-leading talent, the chances of success are significantly hampered.
The bottom line is that many of these companies need external financial support. Bank lending is the most common source of external finance for many SMEs and entrepreneurs, which tend to be reliant on traditional debt to fulfil their start-up dreams. Nowadays, Venture Capital, Private Equity & Family offices are becoming more visible and active in offering financial support to startups & SMEs within the tech industry.
However, in the modern day, SMEs need more than access to finance. Trading, FX, payments, and regulatory compliance are just a few key areas where SMEs are in desperate need of external support in the post-Covid climate. In fact, to circumvent this access issue, SMEs in recent years have even turned to crowdfunding and donations to survive. With the support of public programmes, it has also become increasingly possible to offer hybrid tools to SMEs with lower credit ratings and smaller funding needs than what would be the practice in private capital markets.
A Future in Fintech
It’s not all doom and gloom for SMEs seeking vital banking and financial services support, and the answer to this problem resides in smaller challenger banks and fintech companies, which have emerged to fill this gap. They have been able to monetise and revolutionise the sector by streamlining procedures and investing in technical development for a smoother, faster, and more efficient financial services system.
These fintech companies are compliant with the same regulations as the larger financial institutions, but they are not hindered by legacy technology. Quite the opposite, in fact; they have created purpose-built and tech-driven experiences which rely on cutting-edge RegTech and automated KYC technology to accelerate onboarding processes, streamline anti-money laundering processes, and create a better overall customer experience for those accessing its services.
What’s more, the dynamism and agility of some of these fintech services creates options for SMEs that were never even possible before the 2008 financial crisis. SMEs can also seek the support of fintechs that specialise in solving one key area, or those that offer white-label solution, creating an all-in-one, managed and simple solution for business owners who are unfamiliar with accessing financial services.
It’s unlikely that traditional banks will be able to keep up with this revolution in the financial services sector, due to their typically slow and lethargic approach to new trends. Instead, we are seeing more consolidation in the market, whereby financial institutions invest or acquire smaller fintech companies. These types of partnerships can be very useful, and have great benefits to the end client, as it combines the reach and prestige of traditional banking names, with the flexibility and efficiency of the acquired fintech.
So, although traditional banks may never adapt to the changing times, or offer new products to effectively address the exclusion of SMEs and businesses in Emerging Markets, said businesses can be assured that there is a new wave of fintechs that are changing the industry for good, and in a way that will hopefully provide unprecedented, tailored services to businesses, regardless of their size, history, credit score, or the sector they operate in.
Cryptocurrency and blockchain technology are another area which is fundamentally changing the banking industry like never before, and there is no telling how it will shape the future of financial services. In the next few years, we should hope to see regulation coming to the crypto space, such as MICA, which will hopefully give the virtual asset sector far more credibility, without imposing too many restrictions on it.
As the global economy once again enters a period of high inflation and a rampant cost of living crisis, banks should be doing so much more to support fast-growing SMEs. It’s time to put our faith in this emerging generation of entrepreneurs and innovators and give them the banking services they deserve, which have for too long only been enjoyed by their larger counterparts.