Banking Circle recently commissioned Magna Carta Communications to carry out in-depth independent research to provide a unique insight into what is causing financial exclusion for SMEs – and the opportunities that exist for the financial services sector to improve financial inclusion.

Previously an issue faced by individuals on lower incomes, and those in developing countries without access to traditional bank accounts, financial exclusion is becoming an increasingly dangerous problem for businesses. Generally, larger companies are more secure and better served, financially, so it is the smaller and younger firms facing the impact of post-recession bank hesitancy.

Whilst it has been more than a decade since the financial downturn began, its effects are still felt, and many businesses continue to face difficulties with payments and cashflow. Start-ups and SMEs are seen as higher risk businesses, and in this landscape where banks are less able to take such risks, small businesses are bearing the brunt and unable to meet their full potential.

A 2018 Banking Circle survey of more than 500 SMEs revealed that 92.5% of SMEs have had cause to access business finance within the past five years. Just 13.5% of the respondents said they have never experienced problems borrowing from their usual bank. Without access to this additional funding, 24.6% would have to cut employee numbers and 13.3% believe the business would ultimately fail.

Loyalty costs SMEs dear

Despite such significant dissatisfaction with the current provision, it was recently reported that 51% of the 2,000 SMEs surveyed would still approach a traditional bank in the first instance if they needed additional funding. The figure has in fact increased since the previous survey a year earlier when 45% said they would approach a bank first. This loyalty has the potential to cost SMEs their business.

However, it was encouraging to see this survey also reported an annual increase in the number of SMEs considering using an alternative lender – 30% in 2018, up to 35% in 2019.

There is a growing commitment to improving access to commercial banking, transaction services and lending for SMEs across Europe. But the multitude of issues at play means there is no one-provider-fits-all solution. With Europe’s 24 million SMEs covering every industry, with varying business models, distribution and ambitions, no two firms are alike. This creates a barrier to providing effective and viable financial solutions at scale – neither existing corporate nor retail-focused offerings are suitable, so SMEs are left out in the cold.

We recently commissioned detailed research to investigate the difficulties and opportunities in the market today, and how the industry can work together to improve financial inclusion. The full report, ‘Financial Inclusion for Europe’s SMEs: Building a circle of trust’, was published in June and includes insights from banks, FinTechs and SMEs working across Europe.

A lack of collaborative connections

This latest industry report shows that there are huge numbers of ambitious SMEs with specific needs that are currently not being met. It also shows there are plenty of potential providers of innovative ‘point’ solutions. But a lack of connection between the two is stalling growth. SMEs could be well-served by an open, joined-up ecosystem.

SMEs make up over 99% of all European businesses, accounting for two-thirds of employment and generating more than half of all value added in the non-financial business sector – worth €4,030 billion in 2016. These businesses clearly represent a significant opportunity, yet despite the EU recognising the importance of financial inclusion and bringing in policies and programmes to help deliver better access to SME finance, many SMEs are still unable reap the benefits.

To turn this around and increase financial inclusion requires a collaborative and creative approach, to build a mutually supportive ecosystem in which SMEs can thrive. With access to suitable financial solutions, SMEs are better-placed to increase internationalisation and exports. This helps to support the diversification and resilience of the wider economy which in turn improves social integration and community cohesion.

To move forward and ensure the change remains positive for all, every ecosystem participant must continue the conversation and learn to work together, building collaborative models and solutions that can fit this diverse and disparate market. If they can succeed in this, all providers in the market can reap significant rewards. However, this is no simple task. Participants cannot rely on top-down directives from state institutions, they must lead the charge by finding and building accessible and inclusive solutions from the bottom up.

Leading the rise of a super-correspondent banking network, Banking Circle is helping financial institutions increase financial inclusion by providing their customers with faster, cheaper banking solutions, including banking accounts, local and cross border payments and lending, without the need to build their own infrastructure and correspondent banking partner network.

The full report, Financial Inclusion for Europe’s SMEs: Building a circle of trust, was published at Money20/20 Europe.