SME banking in times of uncertainty

How Covid has accelerated the Fintech/Bank collaboration model to become the new normal 

In these uncertain times, it is no secret that SMEs are some of the hardest hit by the economic impact of COVID-19. But help is at hand. Financial services providers are working to help SMEs navigate the current wave of uncertainty but are they doing enough? and what can we expect as this new ’normal’ plays out over the coming months?

SME banking has until recently been a bit overlooked by traditional banks, but as new technology developments begin to emerge the landscape has become increasingly fragmented as challenger banks and alternative providers in the lending, FX and supply chain financing space have entered to compete. This is now reshaping how small businesses can access and manage their finances. And, depending on which side of the table you are at – fintechs or banks, each brings their own strengths and weaknesses.

The SME experience

SMEs account for two thirds of UK employment and half of turnover in the UK private sector[1]. Yet, they have been notably underserved by traditional banks over the past. SMEs often do not have the time to investigate all the options that are available to them as they are balancing administration, accounting and the day-to-day running of their businesses. As a result, the first port of call has frequently been to keep using their bank.

Fintechs have become increasingly competitive and reliable as more investment has been placed on technology and compliance. Fintechs have been able to grasp the SME pain points and help businesses use technology in an accessible and transparent way.

The opportunity for Fintechs to step up to the plate throughout the current global crisis is massive and will very much define the perception of the industry for years to come.

Shift to digital

COVID-19 has highlighted the need to accelerate towards digitalisation and we note the shift to digital has been huge over the past few weeks. One thing is for sure this operational crisis is causing major shakeups in the world of SMEs. Fintechs have demonstrated they were flexible and nimble enough to adapt to these fast-changing demands, mostly due to the digital nature of the services provided and leaner existing operations in the background.

On the other hand, banks have needed to migrate their SME banking customers through to new digital channels. Although it took time, they have adapted relatively well to the changes, having to rethink their operating model and proving that they can be agile when they need to.

It will be key for both sets of players in the market to be able to adapt to the further fundamental changes that will arise. Beyond the obvious changes in point of sale payments becoming more digital, they must think about all the other services that will need to be digitised. In the current climate, SMEs will require seamless invoice factoring and supply chain financing solutions accessible online and in real-time.

The key to surviving this crisis will be to be able to innovate at pace and manage pain points that were previously never envisioned.

Funding Initiatives

One point of view that will be debated about the handling of the crisis by financial services is the implementation of government funding initiatives. 83% of the funds for the Bounce Back Loan Scheme (BBLS) were granted to UK’s Top 4 banks up to 30 April 2020.

The reason for this decision likely arose from legacy thinking and assumption that larger banks have the vastest share of customers. However, since May 2020 this has been opened up to a wider net including alternative lenders. 

Some issues with automated underwriting and process driven challenges have caused an initial difficulty with redistribution of the funds in the UK, resulting in some SMEs failing to get access to the funds in crucial time. On the other hand, various alternative lenders and Fintechs are still waiting to get accreditation for government backed CBILS, CLBILS or BBLS. Despite this, many have still been able to show that they are able to support customers in times of crisis with various initiatives such as Tully launching a payment relief digital outsourcing service, or others launching a spare debit card feature to help those self-isolating.

Going forward, both sides of the market agree that one of the lessons learned throughout the current crisis is that Fintechs should be included early on in the participation for liquidity issuance to SMEs allowing them to cope with the demand and promote healthy competition.

Pairing relationships & technology

Even when SMEs are entering into partnerships with Fintechs, they still retain their relationships with their banks. The head start that they have is that SMEs already trust them to deliver their financial services.

The current pandemic is likely to allow SMEs to uncover new opportunities in the Fintech market – specifically in supply chain financing and alternative lending – but SMEs have shown that they will still favour assisted human interactions in times of uncertainty. Technology and automation are essential, but the relationship manager element continues to be a vital point of contact.

The right combination of relationship banking and good technology provided by Fintechs should ensure SMEs have a variety of choices available to them.

The Future of Banking for SMEs

The rise of Fintech challengers has refuelled the innovation agenda of incumbent players and in favour of their customers. It is vital that Fintechs to continue challenging the status quo and improve the solutions available for SMEs and the rest of society.

A lot of alternate providers excel at one piece of the puzzle. As a result, collaboration is truly the key to providing SMEs with the best options possible. Solution oriented product designed by combining the benefit of sophisticated services on one hand and efficient delivery on the other requires partnerships between banks and Fintechs.

The future of banking for SMEs is shifting from one that was once a battleground between banks and Fintechs to one of collaboration. The question that remains is whether the Fintechs and the banks who do not choose this route will be able to keep control of the SME market. 

[1] https://www.fsb.org.uk/uk-small-business-statistics.html