Liberating SMEs from the Strictures of Traditional Financial Services

“The SME sector is the backbone of economic activity and employment in most countries….[many] of the historical challenges to serving the segment well can be addressed through digital technology.” — McKinsey white paper October 25, 2022

It is estimated that there are 400 million small businesses in the world. This segment represents a massive 90% of all global business. The UK SME market alone generates around £2.5 trillion in annual turnover, more than half of total private sector turnover. Worldwide, SMEs account for around 50% of all employment (with over 60% in the UK) and are significant contributors to economic development; according to the World Bank, SMEs represent 40% of GDP in emerging economies, in particular. As such, this segment represents a huge opportunity for digital financial services to deliver real impact contributing to economic growth.

Nonetheless, traditional financial institutions have not been entirely successful in their approach to meeting SME needs and, crucially, service delivery. As a 2022 McKinsey white paper observed, “SMEs fall between the cracks of retail and commercial banking”. One of the reasons for this is that smaller businesses typically require comparable attention to bigger operations, while offering less ‘return on investment’ and potentially presenting higher risks. Their complex needs and risk profile means that they are expensive to service, relative to larger corporations, since they are harder to scale.

“[About] half of formal SMEs don’t have access to formal credit” — The World Bank

Financial institutions are also somewhat hamstrung by legacy, inflexible and impersonal communications infrastructure and process workflows around customer onboarding, account servicing and risk management. The reality is that nearly all public utilities, and particularly financial services, are experiencing firsthand the unfolding of a technocratic regime with its associated challenges. This “computer says no” syndrome impacts everything from onboarding (where it can sometimes be simply impossible to jump through the requisite — and largely computerised — hoops around personal identification and financial/credit validations) to funding applications (overdrafts, loans, credit and capital). The closure of branches and the shift towards increasingly “digital only” service has reduced flexibility and the capacity for nuance from the system — there is rarely a human being able to, for example, make a case to a credit team on behalf of a client for making a business loan.

In line with broader market research such as McKinsey’s survey of German financial institutions, Greengage’s own research of UK SMEs ranks good customer service as their number one requirement, even above a physical branch presence. Other key selection and loyalty criteria include better online services and functionality, effective access to more products and services and crucially, access to a relationship manager. By listening to our target customer audience our research also concluded that:

● Businesses that were less than satisfied with current account provisions were willing to pay more to have all their payment needs met. Similarly, businesses receiving a lower level of customer service were willing to pay more for payment accounts, also as they consider they will save costs (in their own time) from higher levels of service.

● Businesses with traditional accounts might choose to add a supplementary e-money account rather than paying their current account provider more money for a higher tier service, or switching completely to a more expensive account provider. Having both types of accounts led to greater levels of satisfaction and customer service than having just the one.

● Account providers that charge higher prices must ensure that they deliver superior customer service to persuade less than satisfied businesses to switch over.

● Businesses with an interest in digital assets tend to have a worse relationship with their account provider than those with no interest. This segment is also willing to pay more to have all of their payment needs met (compared to businesses with no interest or anticipated involvement in digital assets.

Even those financial institutions that can offer an efficient and quick digital onboarding experience typically still have a traditional payments and risk model with respect to fractional reserve lending and deposit-taking, with an increasing danger in a digitised world of payment runs on deposits if there is any whiff of danger. This, in turn, leads to reduced risk-taking, and in essence, a vicious cycle where the real needs of SMEs for service and lending become increasingly difficult to meet for traditional financial services.

Rising interest rates are also not the friend of SMEs and add to their financing challenges. Financial institutions also present systemic risk as recent events demonstrate: the same dynamics behind a run on Silicon Valley Bank’s balance sheet ultimately led to the collapse of a globally systemic bank — Credit Suisse (and it works the other way too, when financial institutions considered too big to fail go under, there is inevitably a domino effect on smaller financial institutions down the line).

“Years of low interest rates, difficult consumer, corporate and investment banking business conditions and a tricky macroeconomic environment have squeezed many core areas of business for banks….. ECB data highlight that for 20% of SMEs in Europe, access to financing is their most urgent problem. The same data shows that one in 5 SMEs is unable to access the credit it was planning to use.” — McKinsey

Restoring the historic relationship between financial institutions and SME customers

SMEs come in all shapes and sizes; at one end of the spectrum are the “S” of the SMEs which are smaller players essentially operating with the same requirements as sophisticated retail clients, whereas the “M” of the SMEs have similar payment requirements to family offices and high net-worth individuals, which are more aligned with the larger corporate segment. What all SMEs and entrepreneurs have in common, however, is that they rate customer service — and specifically, personal customer service — number one on their account services wish list.

Ironically, while many financial institutions are continuing to fail to transfer financial services enjoyed by retail customers, the individuals that own and run SMEs are fully cognizant of the digital customer experience from their own personal account relationships. There is evidently a great opportunity for non-bank challengers (or disruptors) like Greengage to fill an important gap in the digital financial service provision with full service and/or selective service models that offer sophisticated, real-time, always on, digital solutions AND rich customer engagement experience.

Based on listening directly to SMEs, our digital financial services solution offers the best of both worlds — an old-fashioned, relationship-driven ‘branch manager’ approach based on personal contact and personalised support (not one-size-fits-all templated box ticking) and facilitated through innovative Web3 digital technologies moderated by a trusted relationship. We are very much going back to first principles with respect to service delivery and the customer experience.

At the same time, Greengage is seeking to fill the SME funding gap through lending solutions that are entirely ring-fenced from the e-money side of the business. These services are delivered via a B2B lending platform offering digital sources of money. Our consideration is that clients deserve choice in their lending options, and by using an open architecture of third-party balance sheets, we do not need to run the risk of conducting fractional reserve lending using our clients’ monies. Greengage intends specifically to leverage innovation in blockchain and digital assets to unlock funding and liquidity for SMEs and to plug funding gaps — valued at £22 billion in the UK alone and some £4.5 trillion globally.

Peer to peer lending — we like to say we are using effectively the world as our balance sheet — and innovative, automated, lender/borrower ‘matchmaking’ has the potential to open up access to SMEs to higher value (and potentially higher risk) funding than will likely be available through traditional balance-sheet led payment models.

Our deep understanding of AML risk with respect to new crypto and digital assets risk, cutting edge KYC and crypto coin forensics collaborations supports fully compliant, risk-managed engagement with emerging digital-native entities. These clients in turn typically offer innovative solutions which we intend to bring to bear for our wider SME and HNW client base.

Greengage’s digital financial services proposition, built on the core principles of trust, technology and experience, is an intelligent and innovative response to support currently underserved and underserviced SMEs, family offices, high net-worth individuals and digital assets businesses.

Learn more about our e-money account services here.

Read our e-money press release here.