Tech innovation bridges growing SME inequality
The sharp divergence in availability of financing for SMEs is increasing, according to new data from Misys. With growing inequality, technology is being leveraged to try to bridge the gap.
In a report, The Needs of SMEs: Working Capital Challenges and Digital Solutions, published earlier this month, Misys shows there is a growing divide between companies that can gain access to financing and those that can’t.
Although 33% of respondents stated that they were finding access to financing easier, 28% stated it was becoming more difficult. The report notes that this demonstrates a worrying volatility beneath the calm surface of aggregate reports that point to easing financial conditions, and how companies with poorer credit quality may be finding it increasingly difficult to source bank funding.
Banks are still shying away from assisting smaller companies, and SMEs continue to struggle with establishing any strong connections with banks. Brian Edmondson, head of trade and supply chain, solution lead, Misys, says: “Banks are working in specific ways and often will have a focus on specific industries they want to lend to.”
For companies that fall outside the banks’ target customer groups, there is a pressing need for change. The answer seems to come from the greater integration of technology for lenders to underwrite and distribute credit.
Santander has launched an online-only SME loans facility with financial services data company Kabbage. Through the platform it will provide loans of between £500 and £100,000, with a six-month repayment term. If approved, the loans will be provided within days of the application, compared with the 12 weeks companies might have to wait when applying for traditional financing.
Sigga Sigurdardottir, head of innovation at Santander, says: “Through the Kabbage partnership the data is aggregated before a decision is made. The integration of the social media aspect means better decisions can be made on small businesses.” The decision to provide the loans is still based on traditional measures, such as credit ratings, but also takes into account the strength of the company’s social media presence. This information is used to see how popular a company is and the type of feedback it is receiving from customers, to assess how likely it is to continue to run successfully, and its ability to pay back the loan.
Having the system solely online also benefits companies that might be pressed for resources in applying for funding. Sigurdardottir says: “Establishing an online product means companies are able to access the finance quickly. As it is a fully digital solution, smaller companies do not have to spend time on applying for the loan and then waiting weeks for the funds to arrive. There is nothing similar to this available through the high street banks.”
Sigurdardottir says this form of cooperation with the fintechs is set to continue: “Partnering with the fintechs can provide excellent services for the customers. Taking a new approach can solve pain points. Globally we are seeing more partnerships with fintechs and the integration of product offerings.”
The move among SMEs towards the use of a combination of bank and non-bank lending is growing according to the report. Of the respondents, 24% stated they are now financing using a combination of bank and non-bank options. Further, 9% said they have a greater reliance on non-bank platforms than they did two years ago.
Edmondson says the fintech providers benefit from the simplicity of not having the same regulatory demands for holding assets in place. “The non-banks are not subjected to the capital requirements banks have when they assess the risk of a relationship,” he says. They are not overly exposed to risk though as they take it on in the very short term – often less than 90 days. Banks are less interested in lending to smaller companies and on such short terms given the value, volume and potential risk.”
A greater level of involvement from the corporates themselves will side-step some of the restrictions the banks find in face-on lending to smaller entities in the supply chain. “For some industries the corporate at the top is stepping in to bridge the gap,” says Edmondson. “Also, we are seeing companies like Alibaba offering short-term financing. They have a history of the payments made by the company and can assess whether to take on the risk.”
The payments space also benefits from the growth of alternative providers that can offer sophisticated tech platforms that companies could not otherwise have access to. Western Union Business Solutions launched the WU Edge online platform in April to facilitate cross-border payments between businesses. Originally launched in six countries, it has recently expanded to cover 13, including Hong Kong and Poland.
Kerry Agiasotis, Western Union
Kerry Agiasotis, president of Western Union Business Solutions, says the company first created a cash management module, from which the company learned of the issues its customers were facing in making and receiving payments.
Agiasotis says: “It taught us the challenges they faced in trying to coordinate their payments and the invoicing information. By being connected to our customers we gained an understanding of what needed to be included.”
Problems with making cross-border payments were identified in the Misys report. It found 35% of corporates are held back by lack of time or the necessary resources or technology to improve their cross-border payments. A quarter said they have not seen any automation of traditional trade transactions.
These kinds of innovations allow companies access to services they would otherwise struggle to implement. Agiasotis says: “The service provides easy-to-use software that many companies would not have the financing available to obtain otherwise.”
Having a stronger focus on what is needed by the customers through implementing online offerings is helping with the creation of new products and services that actually help companies to carry out their day-to-day business. Agiasotis says: “In the past we’ve seen solutions that seem to solve tech issues, rather than the business issues faced by companies.”