By Anders la Cour, co-founder and Chief Executive Officer of Banking Circle.
Reveals the opportunities for financial institutions to step in and help fill the gap in banking provision for online SME merchants.
It is hard to comprehend just how much has changed in the past decade, in business, in banking, in globalisation, in politics and economics – even before the world was locked down to fight a global pandemic. Of course, ten years ago we were in the midst of a very different global crisis – in finance rather than health. What the two events have in common is the impact on small businesses, and the clarity with which they each highlighted failings or gaps in the banking and payments offering.
Back in 2010, the economy was dominated by cash and cheques, 19% of people had a smartphone and only 10% of European SMEs had taken an online order[i]. Accounts, invoices, statements and calendars were all on paper not digital, let alone in a slick smartphone app. Instant B2B payments were a distant dream. Cross border transfers an expensive luxury often only accessible to bigger businesses.
When so much has changed in such a short space of time, how can we predict the shape of our reality in another ten years? It looks as if COVID-19 has already accelerated change, forcing businesses to adopt digital strategies far sooner than they had planned: increasing online capabilities, adapting to homeworking, accepting new digital payment types, joining online marketplaces to reach more customers.
One thing we can say for certain is that payments have not kept pace with the change we have already seen, let alone what we expect in the coming months and years. In another decade the current offering will be even more out of date and inefficient, excluding more businesses than ever. Something needs to change, and it needs to change quickly to keep up with the flexible, innovative SMEs they serve.
Identifying what needs to change, and how
In 2018 we spoke to more than 500 SME online merchants to find out what banking services they use and the pain points they experience in payments and accessing funding. This year we repeated the study but expanded it to include 1,500 SME merchants across Europe, to assess how the landscape for access to payments services and funding has changed – and how the picture varies across different European geographies.
We found that the challenges continue for most smaller merchants, and opportunities remain for payments businesses and banks to step in and provide solutions to help these vital economic contributors to prosper, whilst simultaneously boosting their own revenue.
Key indicators, key opportunities
In the two years between studies, there has been a shift in the number of UK merchants with separate banking relationships for different geographies. In 2018 3.2% of respondents had separate banking relationships in every region in which the business trades, in 2020 that figure has risen to 17.2%.
Whilst this does of course reflect the growth in international trading, it also shows that small businesses find it hard to find one financial institution that can meet all their cross border banking needs. This is underlined by the drop in SMEs using just one bank for all countries in which they trade: 43.9% in 2020, down from 61.9% in 2018.
These two years also saw noteworthy changes in the reasons behind business borrowing. Increased global ambition saw more SMEs seek a business loan, with funding for international expansion accounting for 27.5% of loans in 2018 and 33.9% by 2020. However, the most dramatic and indicative increase is seen in the need to borrow to cover business costs and payroll. In 2018, 9.2% borrowed to cover payroll and 9.9% to cover business costs. Two years later, 23.5% of UK SME merchants needed additional funding to keep paying staff, and 32.8% would have been unable to pay business costs without external financing.
It is worth highlighting here that those we surveyed were asked to exclude any requirement for funding which was directly linked to the COVID-19 crisis. Therefore, this reliance on external funding to cover basic costs existed even before business was limited or suspended due to national lockdown restrictions, showing that it is a longer-term issue rather than a symptom of the current crisis.
In other European regions, an average of 23% have borrowed to cover payroll and 26.5% for business costs. SMEs based in The Netherlands were the most likely to have needed help covering payroll (28.6%) and – after British firms – German businesses were the most likely to seek funding as a short-term solution to cover business costs (31.5%).
The implications of any inability to gain this additional funding could be disastrous for a small business. In 2018, merchants in the UK said they would have to let employees go (24.6%), and the business could fail (13.3%) without funding. In 2020 these scenarios were even more likely, with 28.7% of SMEs saying they would have to make redundancies and 21.5% fearing the business would fail.
The wider European picture isn’t much better. 30.6% of German respondents said a lack of additional finance would lead to redundancies, and 28% each of Dutch and Nordic SME merchants would expect the business to fail as a result. French businesses were the least likely to have to let employees go, but with 19.9% saying this was a likely outcome, that is little comfort to their employees, especially as 21.5% felt the business would ultimately fail.
Cross border payment pain points
We live in an increasingly digital global market, where consumer or business buyers can purchase almost any product or service from anywhere in the world in just a few clicks, with little regard for details such as FX rates. In this highly competitive landscape it is vital that small businesses can stay competitive and successful by transacting quickly and seamlessly across borders. Yet our research shows that many SMEs have experienced significant challenges when attempting to access cross border payments from their banking partners.
Across all regions, 36.9% struggled with high fees (47.7% of Dutch SME respondents) and 31.6% faced delays due to slow response times (37.7% of Nordic businesses, compared with 22.8% of UK SMEs). Poor FX rates caused issues for 27.3% of respondents, and a poor digital experience caused 26.4% to faulter. 21.6% experienced poor customer service and a lack of understanding of what the business required.
Filling the gap
The world of global digital commerce is a rapidly growing sector; but it is also a sector where entrants face multiple barriers to operate because established financial institutions have a fear of the unknown.
However, banks and payments providers already supporting the online merchant space can deliver a genuine added value by providing their merchant customers with fast, low cost banking services including international bank accounts and access to crucial funding. In the current climate, taking tentative steps out of the COVID-19 lockdown, that support is going to be more valuable than ever. Indeed, for financial institutions that demonstrate a real understanding of SME needs there could be a significant long-term gain.
Clearly now is the time for the financial services sector to step up, and the financial ecosystem model remains strong. Banks or payments businesses working in silo have limited positive impact as resources are spread too thin. But working together within a financial ecosystem, those institutions that focus their resources on developing and delivering solutions in the areas in which they are strongest, working with other providers to build a suite of tailored and high quality services, can deliver better solutions to those SMEs who need it.
Today’s financial institutions – from traditional incumbent banks to payment businesses and FinTechs– have a unique opportunity. They can step in to help online merchants bounce-back, succeed and prosper in ways they could not imagine a few short months ago when the world was a different place.
Key findings of the 2020 research:
Cross border banking is a challenge
Across the European countries surveyed, an average of 19.2% of online merchants have separate banking relationships in every country in which they operate – adding to their costs and resources to manage
2% of UK merchants have separate banking relationships in every country in which their business trades
44% of UK merchants work with just one bank for all the countries in which the business trades
2% of businesses in the Nordics are the most likely to work with separate banks in each jurisdiction
9% of French merchants work with multiple banks
3% of Netherlands firms work with multiple banks
Banking services used by online merchants
Around half of online merchants surveyed said they use short-term loans (47.8%), overdrafts (49.1%), and finance agreements for specific purposes (48.8%)
2% access settlement accounts for cross border payments (43.2%) from their main bank
35% use their bank for foreign exchange (FX) services (35%)
German merchants are least likely to access solutions to help with cross border trade, with the lowest
proportion of all respondents accessing settlement accounts (38.8%) and FX (16.8%)
Accessing finance – how long does it take?
Online merchants reported that accessing business finance had taken them as much as 6 months:
8% said it took 1-2 weeks
6% – 3-4 weeks
7% – 1-2 months
16% – 3-4 months
6% – 5-6 months
The Opportunities for FinTechs and Payments businesses
3% feel their business is well served by their current banking partners; German merchants are the least satisfied at 82.9%
6% of the dissatisfied businesses felt their business is not a priority for their bank, and 41.5% gave high fees as a reason
Approximately one in four respondents dissatisfied with their bank gave each of the following reasons for their dissatisfaction:
poor quality and inconsistent service (28.7%)
slow response times (28.7%)
poor FX rates (24.5%)
[i] Source: https://growth.revolut.com/downloadwhitepaper_2020
The full results of the online SME merchant survey are published in the latest Banking Circle white paper, ‘Mind the Gap: How payments providers can fill a banking gap for online merchants’, which is available to download for free at https://www.bankingcircle.com/whitepapers/how-payments-providers-fill-finance-gap-online-merchants
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