Many economies are now facing a new recession due to the coronavirus pandemic. Governments have so far shouldered some of the burden of keeping small businesses afloat, mainly by providing loan guarantee schemes. As governmental support begins to be rolled back, the banks are also looking to tighten their purse strings when it comes to small business lending, as an ECB survey showed. This spells a precarious future for SMEs needing financing to grow or to compensate for market volatility.
Even before the COVID-19 crisis, small businesses have generally felt under-served and misunderstood by traditional banks. Yet SMEs represent a sizeable market for banks and are therefore hard to dismiss. For the banks, they represent difficult clients to categorise and serve: should they be considered as “retail-plus” or “commercial-low” customers? Moreover, risk modelling for SMEs entails greater complexity and uncertainty than for larger corporate banking clients.
Below we explore some of the ways in which the commercial relationship between banks and small businesses is evolving, as well as key services and initiatives that could improve their relationship.
Business lending in the UK reached a 13-year high at £53 billion during the pandemic and is expected to rise 14.4% by the end of 2020, according to EY. This boost can be attributed primarily to the government’s Bounce Back Loan and Coronavirus Business Interruption Loan schemes. France, Germany and other European countries have seen similar trends.
Meanwhile, it is also estimated that British businesses will not start paying back their debt or reduce their borrowing before 2022. So how can banks continue to finance SMEs while protecting themselves? For starters, they could leverage AI and big data to draw a more accurate measure of a small venture’s default risk and accelerate their credit decision-making processes.
The rated startup Myos, for instance, has developed algorithms that use data from large online marketplaces of the likes of Amazon to predict merchant sales. This enables it to make more informed decisions for small retailer financing. Myos’ innovative approach goes further as it also accepts products as collateral for its loans.
Aside from more tailored risk appraisal and faster credit decision making, business customers also tend to turn to non-bank financing companies for repayment flexibility. Barclays is among the big banks that have taken advantage of the offering developed by fintech newcomers by partnering with MarketFinance. Through this partnership, Barclays can provide online invoice financing solutions to its business banking customers and they can enjoy the pay-as-you-go or subscription repayment models offered by MarketFinance.
Besides traditional financing products, banks could consider expanding their offering with venture debt. For example, in 2019 Crédit Agricole d’Île-de-France partnered with the endowment fund RAISESHERPAS to create the Prêt Expansion, a non-dilutive financing option for fast-growing startups. As the equity market slows down in reaction to economic turmoil, demand and offer for venture debt are projected to grow in the upcoming months.
In the aftermath of the pandemic, business owners will have their eyes peeled on their cash flows, as they prepare to face greater liquidity risks. Hence, being able to digitally and efficiently manage cash and treasury will come top of mind for SMEs. Several banks have partnered with fintechs, such as Neo and Bank of Spain, to provide more agile and comprehensive virtual cash management solutions for businesses big and small.
These partnerships can, among other things, improve the customer experience for this type of service. Indeed, many banks still handle different corporate channels in silos (liquidity, payments, supply chain finance, etc.). The co-development of new online cash management offerings can provide a more unified approach to business clients, which is generally preferred.
Beyond more unified digital experiences, small business owners are set to greatly benefit from professional guidance in managing their cash and treasury. This could be in the form of virtual consultations with bank experts or simply through online educational content and resources.
That is an approach that was used by many banks including Barclays, which set up a section on its website to collect relevant information and articles for businesses in times of coronavirus. Similarly, since the start of the lockdown period HSBC has increased the frequency of its educational newsletters to its business customers. The bank also set up a virtual assistant and a helpline for SMEs and asked its relationship managers to proactively contact their customers to provide guidance.
Philippe Brassac, CEO at Crédit Agricole, recently said in an interview with the Financial Times: “There is an urgency now, to increase financial performance and lower the cost income ratio.” He added: “There is a solution, it is co-operation.” Understand here that the French banking giant has secured partnerships across Europe with Bankia, Credito Valtellinese and Amundi among others, to provide its services to a growing network in a cost-effective way - protecting both its profitability and its customers in the process.
If co-operation can be a winning strategy for large financial institutions, it can also provide growth opportunities for SMEs. Indeed, beyond providing traditional services, banks hold the power to connect their business clients to their network of partners and suppliers.
Take LCL SmartBusiness for instance: the French bank LCL has set up a programme to help its business clients find tech suppliers and partners. This enables them to accelerate their digital transformation and learn from the bank’s wide network of innovation and cybersecurity partners. Early Metrics is among these partners and has conducted several startup rating missions through the programme, providing startups with an independent audit and mid-sized businesses with reports on potential startup collaborators.
By assisting their clients in forming partnerships and implementing business-enabling technologies, banks can potentially improve the resilience of their business customers and as a result, reduce default risks.
All in all, what SMEs expect of their bank is essentially three things: more options, more guidance and better digital experiences. As challenger banks such as Virgin Money, Monzo and Starling move further into the business banking segment, incumbents will have even greater motivation to innovate their SME services and protect their market share. Still, the recession and economic instability brought by the global pandemic will undeniably put a strain on the banks. We hope they will seize the opportunities that lie in the tech ecosystem to keep helping small businesses survive while protecting their own interests.