Why do SMEs matter?
In 2022, SMEs in the European Union (EU) employed 84 million people, provided €3.9 Trillion of Gross Added Value (GVA) and contributed up to 56% of the EU economy.
Yet, SMEs accounted for just 20% of global banking revenues according to FintechOS.
New technologies, new regulations, new entrants, and ongoing crisis (financial, pandemic, geopolitical) have kept the SME financial service landscape in perpetual motion. Despite these changes, SMEs still face the same challenges accessing banking and financial services.
Today, a new set of fintech is tackling the SME ecosystem. Traditional banks have historically been slow to adapt but are trying to react to provide relevant solutions.
Why are SMEs underserved?
SMEs represent the ‘long tail’ of banks' business and this results in SMEs having generic, standard, non-customised services that do not fully address their requirements.
SMEs often find themselves in a challenging position between consumers and large corporations. While large corporations may have dedicated teams from banks to serve their needs, SMEs do not have the same focus, as there are no economies of scale for dedicated account managers.
Assessing SMEs' ability to repay loans in the long term is challenging and requires looking at idiosyncratic risk factors (factors considered unpredictable, non-systemic and to be assessed case by case). Here, the risk assessment related to SMEs is not a straightforward process and risk models may not be appropriate. Lending to SMEs often requires tailored attention and support throughout the onboarding process leading to higher administrative costs and greater risk.
Taking this into consideration, SMEs have never been a priority focus for large banks and have historically been underserved until the open banking era.
Open banking has given rise to fintech companies that are changing the way financial services are offered to SMEs. These players are today growing fast, organically and inorganically. Qonto and Manager.one in France, Penta (bought in 2022 by Qonto) and Kontist in Germany or Monzo in the UK are among the successful European SME neobanks embodying that trend. Some large banks have also begun developing initiatives to solve SMEs’ pain points, but that remains sparse and it may require more ground-breaking innovations to appropriately serve the needs of SMEs.
SMEs pain points and unmet needs
SMEs have a short lifespan and only 49% will reach the 5-year lifespan threshold according to JP Morgan. At Edgar, Dunn & Company, we have identified 5 common drivers that push SME owners to shut their businesses:
• Risk of bankruptcy & lack of financing: SMEs lack capital or funding to sustain their lifespan and growth, with a recent ECB report estimating at €400 Billion the SME financing gap observed in Europe
• Lack of resources: EU SMEs require additional resources at the beginning of their lifespan. Human, digital and financial are the usual suspects. 76% of SMEs have expressed their need to develop further digital technologies in the Flash Eurobarometer survey conducted in 2020.
• Pressed by time: SME owners may often get distracted by tasks that are not vital to their core business. 40% of SME owners reported spending on average 80+ hours a year on bookkeeping and tax management.
• Fierce competition: In most cases, new SMEs enter red ocean ecosystems where competitors are bigger, more established, with greater brand recognition and equipped with more resources. SMEs need to differentiate themselves and bring added value to their clients.
• Inability to initiate digitalisation of their business: Digitalisation assists SMEs to streamline their operations and reduce paperwork, access the e-commerce ecosystem and benefiting from digital payments. In 2021, only 56% of EU small businesses reached a basic level of digital intensity (the degree of digitalisation achieved by an organisation), and only 3% reached the maximum level. The European Commission found that digital SMEs are more likely to export than non-digital SMEs. By digitalising their operations, SMEs can gain a competitive advantage in exporting their products and services to foreign markets. Digitalisation also allows SMEs to improve logistics, expand market reach, and provide a better knowledge of the market competition.
How commercial card products and card-related services assist SMEs overcome these pain points
What card products, services and additional features are traditional issuers and fintech today offering to assist their SME customers overcome their unmet needs?
Simplicity and transparency of SME financial services: At Edgar, Dunn & Company, we analysed 130+ SME card products in Europe and observed that 29% of business card programme prices are not today available on traditional banks’ websites. Yet, pricing is a key component for simplicity and transparency. As SMEs are pressed by time, they expect intuitive and simple financial services with a smooth customer experience. Onboarding is today expected to be a digital and swift process. Where it may take weeks at a traditional financial institution, several fintech such as Penta, Monzo, Manager.one or Qonto claim to run that step within a few clicks.
Increasing digitalisation of services offered to SMEs: 57% of EU SMEs are willing to move to an online/mobile banking business environment, while 95% of commercial clients who bank digitally in their personal lives also expect to do so at work. The Covid pandemic has heightened the need for SMEs to enhance digitalisation (e.g. ability to sell online, ability to process information digitally such as CRM, ability to digitise AP – Accounts Payable and AR - Accounts Receivable processes and payments). Larger organisations have made the shift long before the pandemic. Issuers can play an active role to support SMEs transition at different levels (e.g. facilitating online sales with an acceptance/acquiring package, provide training to sell online, providing digital payment tools, integration between payments and accounting etc.). For instance, Manager.One in France has tailored a SME virtual card product to facilitate online payments and make the process safer. mBank in Poland provides e-commerce tips to assist SMEs understand digital opportunities. Such initiatives are today becoming underlying trends.
Easier access to credit to facilitate cash flow and working capital optimisation: SMEs have long relied on financial institutions for access to credit. The process takes time and effort, with uncertain outcomes. In fact, during the pandemic financial institutions provided less credit to SMEs – a paradox at a time when working capital was most needed by SMEs. An EU survey concluded that 51% of SMEs reported late payments squeezed their liquidity during the COVID-19 crisis, compared to 39% in 2019.
Today, SMEs are increasingly looking at different solutions to access credit (e.g. credit facilities associated with credit cards, extended payment terms, dynamic discounting, B2B BNPL – Buy Now Pay Later etc.) and from an increasing range of players beyond traditional financial institutions. Increasing working capital capacity is key to all SMEs.
To mitigate the Risk of bankruptcy & lack of financing, fintech such as Capital on Tap in the UK provide access to short-term credit for SMEs with a credit card that may guarantee a line of credit of up to £150,000. Others, such as Berlin-based Billie, provide B2B BNPL services aiming to solve cash flow issues. We have identified a plethora of players building digital lending offers across Europe to answer the very needs and requirements of SMEs.
The four ‘must have’ best practices issuers need to consider when targeting European SMEs
Edgar, Dunn & Company has identified different best practices for issuers related to SME card products. Out of these best practices, four have been considered as ‘must have’ for any issuer willing to thrive in the SME ecosystem and become successful.
- Provide end-to-end and self-serve digital processes: As 76% of SMEs suggest the pandemic has triggered their need for digital transformation, SMEs increasingly require access to banking digital processes to operate changes when required (e.g. onboarding, request for additional cards, card activation, card control and control of card features such as e-commerce purchases or purchases in specific countries etc.). Digital services provide the control and flexibility required by SMEs to manage their card portfolio without needing third-party assistance. Luxembourg-based Olky Pay provides integration with ERP to optimise debt collection, TripActions and its end-to-end and self-care digital processes for travel, and the Deutsche Bank photoTAN app to transfer payment data in the banking reporting tool are some of the use cases currently being developed by both traditional banks and fintech in Europe.
- Provide real-time services: Instant payment and payment notification services (e.g. N26 Business), instant mandatory receipt scanning (e.g. Manager.One) or real-time notification to employees for out-of-policy purchases (e.g. TripActions) are among real-time payment innovations that are today emerging as best practices to serve SMEs. Businesswire estimated that 69% of organisations did not use real-time payments until now. Yet, real-time service is a key aspect for SMEs pressed by time. The market will provide significant opportunities for issuers who will be able to deliver real-time services and tools to SMEs.
- Provide a high level of control, security, and fraud protection: As 60% of SMEs become bankrupt within 6 months of a cyber-attack and 51% of fraud episodes are committed by staff with 6+ years in the organisation, fraud is an internal and external threat that can lead to tragic consequences. SMEs also require a high level of control to manage their portfolio of business cards to reduce risk levels (e.g. fraud, employee unauthorised spending, location of cardholders etc.) and the ability to modify features associated with their cards in a fast and safe manner. Activation/deactivation of payments and cash withdrawal (e.g. Kontist in Germany), location awareness controls allowing cardholders to keep their debit card active around their phone, or only within a specified region on a map (e.g. Ally Bank in the US) and premium standards of fraud protection features linked to a business card (e.g. icard in Bulgaria) are among the industry best practices that SMEs with limited resources may expect when opening a business card account.
- Provide simple and transparent pricing to optimise financial service costs: In the UK, while banks charged SMEs £4 Billion of hidden international money transfer fees every year, 43% of SMEs found international trading more attractive if foreign exchange fees applied by their banks were to be more transparent. Today, simple and transparent pricing is a must-have for banks to clearly articulate costs to SMEs. Pricing needs to be easily accessible by SMEs at all points of interaction (e.g. website, brochures, chatbot, call centre etc.) and cards may also be bundled with additional financial services allowing SMEs to optimise their costs associated with financial services (e.g. credit facilities). Conotoxia in Poland offers a multicurrency virtual or physical card with 160+ currencies with best-in-class fees. Pliant in Germany, Bunq in the Netherlands and N26 in Europe are among the neobanks that advocate a fixed price per month and per account including all services and without any hidden costs. Banco Cooperativo in Spain allows SME cardholders to postpone funds to be withdrawn from their account for one or more specific purchases and supplier invoice settlements (up to 60 months) of a minimum of 90 euros without affecting the set limits for purchases and cash withdrawals. These market initiatives are gradually raising SMEs expectations.
We have also identified three other best practices that can be considered “nice to have” and can be viewed by issuers as an opportunity to differentiate from competitors. Enrich SME card product offerings with non-financial services, increasing back-office automation related to financial service activities and supporting CSR – Corporate Social Responsibility & environmental initiatives, are the best practices for addressing SME growing needs. SMEs will not necessarily select a payment card issuer for these features but this could be a differentiating aspect allowing them to gain market share.
Size, industry segment and turnover are among the attributes that differentiate SMEs from each other but SME banking needs are by and large predictable and comparable. Yet, few fintech and fewer traditional financial institutions have created products meeting all SME requirements and we expect a growing number of issuers to address best practices to target efficiently SMEs.
The EDC B2B team led by Greg Toussaint and with Louis Wapler’s involvement has a deep understanding of key trends currently shaping the SME card product ecosystem. We work closely with fintech, financial institutions, schemes and actors in the B2B payment space and assist issuers to shape the best value proposition to address SMEs.
The content of this article does not reflect the official opinion of Edgar, Dunn & Company. The information and views expressed in this publication belong solely to the author(s).