MANAGING INNOVATION: SME BANKING & PARTNERSHIPS
We're in it together...
According to a recent White Paper from Banking Circle, partnership working is very much on the agenda at Europe’s big banks… and that’s good news for the SMEs they serve, who are desperate for better, cheaper financial services as they struggle to hold up the economy, says Jon Levine “Small business is both the Holy Grail of the banking market and also its biggest challenge,” says Jon Levine, co-head of institutional banking at Banking Circle, the payments bank.
There is an argument, of course – levelled by many SMEs and the organisations that represent them – that they’ve been left at the bottom of the list when it comes to legacy institutions updating their banking services in the UK and Europe. Perhaps because, until recently, SMEs had nowhere else to turn, but to them. That is no longer the case. Even before the pandemic, which many see as a tipping point in alternative financial services provision for SMEs, a key indicator of small businesses’ loyalty to traditional banks showed signs of strain. According to an Organisation for Economic Development and Co-operation (OEDC) report in 2019, bank lending to SMEs in the UK remained flat in nominal terms over the previous 12 months, while finance from alternative sources, such as P2P business lending and P2P invoice finance, rose markedly, albeit from a small base. The following year's pandemic forced the UK government and others to engage with challengers to deliver recovery programmes for SMEs, bringing many business owners into contact with what were once ‘alternative’ and are now increasingly mainstream providers of financial services for the first time. Challenger Starling Bank, which currently has less than five per cent of the SME market but has worked hard at
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TheFintechMagazine | Issue 20
creating a marketplace of integrated third-party services for small businesses, predicts that the pandemic will help accelerate its share to nearly 20 per cent in five years... and that’s just one bank. A raft of other niche fintechs and paytechs have started to unpick banks’ relationships with SMEs, offering alternative services and a toolkit of useful plug-ins, made possible in many cases by open banking. Now, according to Levine, these providers are very much in banks’ sights – not as rivals, but as potential partners to deliver payment services in particular.
Many an SME owner or manager would tell you they still don’t have the banking experience that they aspire to. But, to be fair, many banks would tell you the same thing; that they’re still working hard to get it right SME payments have tended to be very expensive; they don’t have the volume to leverage discounts that large firms with purchasing power enjoy. That is changing, although probably not fast enough. “I think many an SME owner or manager would tell you they still don’t have the banking experience that they aspire to. But, to be fair, I think many banks would tell you the same thing; that they’re still working hard to get it right,” says Levine.
The genesis of Banking Circle was never as a rival to financial institutions. Instead, it set out to provide them with a non-competitive, shared payments resource – a new infrastructure to speed up delivery of services to their accountholding customers, while lowering the total cost of ownership for innovative solutions to some very persistent problems. “Our mission is always to enable other financial institutions to serve the end customer,” says Levine. “It’s the way we’re set up. It’s in our DNA. So, we’re never banking the last mile. We’re never KYC-ing an SME; we’re never facing them. Rather, we’re serving their banks, and their fintech providers, with the services to allow that bank, or other financial institution, to provide them with a great customer experience.” One of the solutions it’s providing is to help clients tackle the adoption of new instant payment schemes for businesses. Much still needs to change before real-time payments become more widely adopted for corporate use, especially for business trading across borders. For many banks, it comes down to addressing the inherent legacy systems on which their operations are built. For example, there are often issues connecting banks’ front end, what the customer sees, through to the instant payment schemes themselves. Managing liquidity by bank treasuries outside of normal working hours is another issue, and the dreaded payment repair queue – where a payment issue prohibits straight-through-processing – can diminish the benefits of instant payments.
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