Fintech has a role to play in the post-pandemic recovery of SMEs | Banking


SMEs have had a few difficult years. Brexit uncertainty hangs over many small businesses, 40% believe it will have a negative impact on their business (YouGov, 2020). Then the pandemic struck, adding further turmoil. While some sectors such as electronic commerce have exploded, more broadly SMEs have been severely shaken. Profits were reduced, customers lost and many companies had to lay off staff or resort to layoffs. Together, this has reduced the growth prospects for many small businesses.

SMEs are eager to recover, but it is an uphill struggle. Many often depend on the big banks for loans and other financial aid. Limited competition in the banking industry means that many of these services have not changed in years and, in the current macroeconomic winds, can no longer provide the much needed relief. However, traditional vendors have left a gap in business banking services that fortunately fintech is filling.

Under-served by outdated solutions

While innovation from large companies like Amazon is celebrated, SMEs are often the pioneers of new ideas. Their size and agility allow them to pivot quickly and adapt to the weather. This is best illustrated in the way small businesses have responded to the pandemic. Many of those who had never sold online now use e-commerce as their primary channel. Companies that did not allow employees to work from home quickly implemented remote work policies. Many have even forged new paths to profitability in a matter of months.

Yet despite this agility, SMEs have long been underserved by their banking providers. The financial products available are disconnected from innovation and do not meet the needs of today’s SMEs. Large-scale outdated offerings have limited their opportunities and mean they have not been able to access the benefits of digital banking, such as real-time transaction tracking or online cash flow management. . In addition, the terms of the business loan agreements have been unfavorable to the needs of small businesses. As consumers overcharge their finances with digital banking apps, investment tools and smart savings pots, it seems regressive for SMBs not to have the same convenience.

The pandemic has put even more pressure on the small business community and SMEs are looking to digital challengers to fill the void in business banking. 41% of UK SMEs have now adopted fintech to some extent for payments and banking services (Raconteur, 2020). As the fintech industry grows and offers more solutions, the number of SMEs that turn to digital challengers will only increase.

FinTech to the rescue

While many great innovations are coming out of the FinTech industry, there are a handful that will be essential for SMEs looking to offset the damage caused by the pandemic:

1. Open Banking

Open Banking has promised to provide more competitive financial services tailored to the client (business or consumer). Although it has not yet reached its full potential, Open Banking will become much more important as the UK moves towards economic recovery. Open Banking should make financial services for SMEs much more user-friendly. As institutions are able to more easily share data with fintechs, small businesses will benefit from a rich set of new products. This has far-reaching implications as everything from invoicing to expense management will improve as new solutions for SMBs come to market. This will help reduce a lot of friction for SMEs and improve their day-to-day operations.

2. Lending platforms

SMEs have long supported on-balance sheet loans, but this outdated practice does not meet the demands of modern businesses. The loan requirements of SMEs have changed. A business may want a short-term ad hoc loan to cover a lull during the summer months or small cash injections throughout the year to support growth. This is not possible with older loan providers, but this is an area where newer loan platforms can help. With these loan markets, SMEs will be able to access the products of many third-party vendors and find the best solution for them. It will also extend to more complex lending programs such as equity solutions or finding venture capitalists, which will become easier with new lending platforms.

However, the bounce loans that many SMEs used during the pandemic are mostly available from traditional banks. While this is a setback for competitive lending, as the market returns to balance we will see more SMEs served by new solutions.

3. Smarter digital payments

Finally, new digital payment initiatives will improve the way SMEs do business with their customers. Recipient Confirmation is one of these programs. It ensures that the person making a payment enters the correct payment information by sending prompts to the payer when changing payment details for new or existing vendors. Another is the demand for payment. Request to Pay allows businesses to request money from a customer through an email message and offers customers the option of paying in installments. Both tools will make digital payments smarter and help businesses get paid on time without falling victim to customer errors. Critically, these tools will also act as an anti-fraud measure helping to tackle digital crime which has increased exponentially since the start of the pandemic.

Bridging the gap

There are many challenges on the horizon for the small business community. With relief efforts coming mainly from the Big Four, the progress of the fintech industry has been temporarily slowed. SMEs are also more indebted, which makes it difficult to grow as a business. The unwinding of this debt is essential to the success of the recovery plans of the community at large.

However, the gap in SME banking is being bridged through fintech. As the fintech industry continues to drive new innovations for SMEs, everything from new lending products to smarter digital payments will help drive recovery and ensure SMEs are better positioned to rebound.

This article was written by Charles McManus, CEO, ClearBank

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