By Philip WernerManaging Director, Stanhope Financial Group
SSmall and medium-sized businesses are the engine of the global economy, but for too long these dynamic businesses have found themselves with limited access to the premium banking services enjoyed by larger, more established organizations. Following the crash of 2008 and the chaos of the global pandemic, an unhealthy culture has developed among big banks that it is now too easy to blacklist an SME, deny it basic banking services and justify his decision for fear of risk. The OECD even revealed that this tightening of credit conditions was clearly evident to all bank customers, especially SMEs, and the European Central Bank has also confirmed this to be the case, citing the poor economic outlook for SMEs, the increased cost of capital and the desire to rebuild banks’ balance sheets, as the reason for the global devaluation of SMEs.
This knee-jerk approach has not only left many ambitious businesses without the services they need to thrive, but it also means many banks will miss the opportunity to work with and support the next generation of high-growth businesses.
While no one is saying risk assessment isn’t essential, it shouldn’t be used as a mechanism to prevent legitimate businesses from getting the support they deserve. The consequences of this trend have been negative to say the least, with many companies struggling to stay afloat, confused as to why the critical services available to their biggest rivals are completely beyond their reach.
One of the biggest victims of this “banking elimination” has been companies in developing countries and crucial emerging markets. The facts speak for themselves, with economic growth down 6.8% in emerging and developing economies from 2008 to 2009, which is higher than the average total of all advanced economies combined during this period.
The pandemic has forced many banks to act and start offering services to businesses of all shapes and sizes, usually at the request of the government. Loans, financial support and counseling became available for a very short time, with these programs being canceled now that lockdown restrictions have been lifted.
The sad reality is that for many businesses seeking access to high quality financial services from Tier 1 banks, from payments to currencies, the basic banking infrastructure is simply no longer readily available.
The crash of 2008 was so long ago, and now even the challenges of Covid have largely been overcome, and yet these basic financial products and services for SMEs show no sign of affordability, even when the global economy s is stabilized. Indeed, top-tier banks have traditionally prioritized the higher incomes of large corporations and multinationals, rather than SMEs. Essentially, this means that SMEs are overlooked because maintaining them is seen as too much effort, all for lower returns.
At the macro level, lack of financial access for SMEs has a profound effect on global and local economies. In the EU, for example, there are around 23 million SMEs, employing around 100 million Europeans. It can be said with certainty that SMEs play a vital role in economies.
In addition, banks have considerable opportunities to invest in emerging markets. Around the world, nearly two billion people have never had a bank account, and over the next decade it is expected 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 presents a huge opportunity for banks to capture new customer relationships at an early age and take advantage of a financial world that is gradually moving towards the Internet and banking technology.
Moreover, in the wake of Covid-19, almost all advanced countries are looking to boost innovation to boost their economy and accelerate long-term industry success. However, without funding for exciting startups, entrepreneurs and world-class talent, the chances of success are drastically reduced.
Ultimately, many of these businesses need external financial support. Bank loans are the most common source of external financing for many SMEs and entrepreneurs, who tend to rely on traditional debt to fulfill their startup dreams. These days, venture capital, private equity, and family management offices are becoming more visible and active in offering financial support to startups and SMEs in the tech industry.
However, today’s SMEs need more than access to finance. Trading, foreign exchange, payments and regulatory compliance are just a few key areas where SMEs desperately need external support in the post-Covid climate. In fact, to circumvent this access problem, SMEs have even resorted in recent years to crowdfunding and donations to survive. With the support of public programs, it has also become increasingly possible to offer hybrid tools to SMEs with lower credit ratings and lower financing needs than would be the practice in private capital markets.
A future in Fintech
It’s not all bleak for SMBs looking for vital banking and financial services support, and the answer to that lies with smaller challenger banks and fintech firms, which have emerged to fill the gap. this gap. They were able to monetize and revolutionize the industry by streamlining procedures and investing in technical development for a smoother, faster and more efficient financial services system.
These fintech companies adhere to the same regulations as large financial institutions, but they are not hampered by legacy technology. Quite the opposite, in fact; they’ve created purpose-built, technology-driven experiences that leverage state-of-the-art RegTech technology and automated KYC technology to speed up onboarding processes, streamline anti-money laundering processes, and create a better overall customer experience for those who access its services.
Additionally, the dynamism and agility of some of these fintech services creates options for SMEs that were not even possible before the 2008 financial crisis. SMEs can also seek support from fintechs that specialize in solving a key area, or those that offer a white-label solution, creating an all-in-one, managed, and simple solution for business owners who are unfamiliar with accessing financial services.
Traditional banks are unlikely to be able to keep up with this revolution in the financial services industry, due to their generally slow and lethargic approach to new trends. Instead, we are seeing more market consolidation, where financial institutions are investing in or acquiring smaller fintech companies. These types of partnerships can be very useful and have great benefits for the end customer, as they combine the reach and prestige of traditional banking names, with the flexibility and efficiency of acquired fintech.
So while traditional banks may never adapt to changing times or come up with new products to effectively address the exclusion of SMEs and emerging market firms, businesses can rest assured that there is a new wave of fintechs changing the industry for good. , and in a way that will hopefully provide unprecedented personalized services to businesses, regardless of size, history, credit rating, or industry in which they operate.
Cryptocurrency and blockchain technology is another area that is fundamentally changing the banking industry like never before, and it is unclear how this will shape the future of financial services. In the next few years, we should hope to see regulation coming to the crypto space, like MICA, which will hopefully give much more credibility to the virtual asset industry, without placing too many restrictions on it.
As the global economy once again enters a period of high inflation and a widespread cost of living crisis, banks should do much more to support fast-growing SMEs. It’s time to trust this emerging generation of entrepreneurs and innovators and give them the banking services they deserve that have too long been reserved for their larger counterparts.