Bringing financially excluded SMEs into the banking ecosystem

Financial exclusion is no longer limited to vulnerable consumers. Anders la Cour, co-founder and chief executive officer of Banking Circle, looks at the increase in financially excluded SMEs, and the solutions which are coming to their rescue.

The term ‘financial exclusion’ typically conjures up images of vulnerable people living hand-to-mouth. Those who are Financially Excluded do not have a bank account, are unable to access credit and are often forced to seek alternative sources of cash  to pay the bills and avoid losing services or being evicted from their homes. 

Two million UK households have no bank account and are unable to access traditional credit or borrowing. But it’s not just individuals who are affected by financial exclusion. Many businesses are also finding themselves unable to access the credit they need to operate on an on-going basis, never mind be competitive or even expand.

When SME lending changed forever

Since the beginning of the financial crash business lending has been a challenge. Banks have struggled to lend to any business, let alone what are often perceived as riskier start-ups and SMEs. Yet, with SMEs making up 99.9% of private businesses and employing 60% of the UK workforce  – 16.1 million people – this is a dangerous situation. If these businesses cannot access necessary finance, they may have to let employees go. In turn, that impacts the economy, which reduces lending, which puts even more companies out of business and people out of jobs.

The economy needs SMEs. Consumers need SMEs. 

One of the challenges is that, as Louise Brett, Head of FinTech for Deloitte put it in 2017 , “…for almost a decade, banks have been given the ultimate mixed-message: ‘lend’ and ‘don’t lend’. Regulators want them to be less risky, but politicians don’t want to see small businesses starved of funding.” 

With the increasing use of the latest risk assessment technology, and automated lending decisions, SMEs have suffered. Banks are closing branches, and as a result many companies have lost access to the experts who understand their business and can fairly assess their risk to make an informed lending decision. Traditional banks no longer have the resources to scrutinise every application in this way.

Of course, such a labour-intensive assessment process came at a cost, excluding many businesses even when lending was more readily available. A new solution is urgently required. But it cannot be the same offering, delivered in the same way it has been for generations, through the traditional legacy systems which add time and cost. 

Businesses today move quicker than ever before, and their finance options need to keep up. For a business lending solution to be cost-effective and meet the needs of even the smallest microbusiness, it needs to be built with those companies and their specific requirements at their heart. 

Last year, Deloitte predicted that with the launch of Open Banking, 2018 could be “the year that the small business lending taps are turned on in full.” Sadly it seems that was a little overoptimistic, but the tide is slowly beginning to shift.

Identifying the challenges

Earlier this year we carried out a survey amongst those responsible for finance decisions in over 500 SMEs of all sizes. We wanted to find out about the pain points in today’s business borrowing journey.

Of our respondents, 92.5% have had cause to seek finance within the past five years, and just 13.5% experienced no problems with the process. More than half (52%) of the SMEs needed finance to purchase essential equipment for the business. 35% hoped to borrow so they could buy stock and 28% needed help to expand into new markets.

The challenges these SMEs faced focused primarily around rates, fees and speed. 35% said their bank didn’t offer the best rate; 28% found the fees too high; and for 23.4% and 21.4%, respectively, the speed of facilitation of the finance and even speed of response from the bank were a problem. 18.8% found that their bank didn’t offer the length of loan they wanted, demonstrating the inflexibility of traditional banking systems.

Any of these issues has the potential to exclude a company from fair and affordable access to the finance required for business prosperity or expansion.

A quarter (24.6%) of the SMEs said that without additional funding they would have to let employees go. 13.3% expected that the business would not survive without access to extra finance.

Banking ecosystem to the rescue

It has been reported that just two in five start-ups make it to their fifth anniversary. Looking at the picture of financial exclusion identified by our research, this is unsurprising. Bank legacy systems are inflexible and render traditional banks unable to meet the borrowing needs of today’s businesses. To remain competitive, SMEs need easy and fast access to cash, without the high fees and interest rates often imposed.

Working with a financial utility, such as Banking Circle, financial institutions can now offer business customers access to better borrowing solutions, without having to devote in-house resources to the task or invest in new systems development, as well as underwrite the financial risk. Working with third parties in the ecosystem model we have championed allows financial institutions to deliver transparent, easy-to-manage, flexible and low-cost lending solutions. And crucially, without risk to their own business.

And this means financial exclusion can be turned into financial inclusion, with the long-term prospects for SMEs of all sizes looking more positive than they have done for some years.

The full results of the SME study are included in the white paper, ‘The epic business loan battle: SMEs fighting for finance’, which can be downloaded here.