Bruno Macedo is a leading FinTech specialist at five°degrees, a new generation digital core banking provider. Since joining the company in September 2017, Bruno has held roles as Business Architect, Head of Implementation Consultants, and Head of Delivery Implementations.
Previously, Bruno was a lecturer in FinTech, Information Systems Security, Business Intelligence and Management at the University of Lisbon/IDEFE; Founder and CEO of Macsribus; a FinTech and Research Intermediation company; and Senior Product and Product Manager at Fincite.
Today he writes for Business Leader on how ‘open accounting’ can help banks provide greater SME lending…
The importance of SMEs
Small and medium-sized businesses are the backbone of the UK economy, accounting for half the turnover within the private sector and, as calculated by McKinsey, representing a fifth of global banking revenues. The Centre for Economic and Business Research also highlights SMEs contribute in excess of £200bn a year to the UK economy, with this number set to grow to £240bn by 2025.
As we know, SMEs have a very specific and different set of financial needs when compared to bigger enterprises because the sector hosts a number of different types of businesses – from sole traders and start-ups, to medium-sized retailers and manufacturing companies.
Yet despite being identified as a highly profitable segment, up until recently – and to some extent still now – SMEs have been alienated by traditional banks and financial institutions when applying for loans and lending services. This failing, to seize the market opportunity in Western Europe, is down to five key challenges facing SMEs.
What are the challenges facing SMEs when accessing loans?
Firstly, the onboarding process when it comes to SMEs is still a primarily complex manual. Paper-based processes involving the delivery of elaborate sensitive paperwork that is usually not readily available for SMEs, or that due to fear of compliance and audit, the SMEs themselves might feel hesitant to provide.
Secondly, the traditional bank’s growth model determines a criteria of who they work with. This causes challenges when it comes to granting credit facilities to SMEs as they are seen as higher risk for conducting business with than larger organisations.
Thirdly, banks tend to follow bigger sources of revenue and SME profitability is typically lower than larger organisations, leading to the de-prioritisation of small and medium-sized businesses.
Fourthly, clunky legacy systems prevent banks from servicing SME customer demands which go beyond core services. For example, a SME might have a desire to integrate P2P lending, blockchain based services, mobile wallets, accounting and legal functionality all as one end-to-end service – this is not possible with a traditional legacy offering.
Finally, the apparent effective technologies available for servicing competitive loans for consumers in seconds doesn’t seem to be present yet in the SME lending segment.
Keeping traditional banks competitive
Big banks need to develop their business model in order to avoid losing out on business opportunities to challenger banks that offer agile, innovative and digital-centric services. The traditional banking model of working with small and medium-sized enterprises is no longer fit for purpose and needs to evolve in order to fully harness the SME market opportunity. As SMEs grow, they become more attractive to lending and leasing financial services due to the low default rates and appetite for new products.
If traditional banks want to stay competitive they must match their complexity with technology – providing SMEs with a better level of access to lending services. Banks should take advantage of opening up their data via APIs to a network of third-party specialists, as mandated by the ‘open banking’ era. This will enable them to embrace new developments, diversify portfolios digitally and offer highly-personalised and innovative SME banking products and services. Most importantly, under this new digital paradigm banks will be able to re-connect with their SME customers.
Using an open data exchange ecosystem, banks can access real-time SME data, drastically increasing the information available when assessing risk. Accessing data via ‘open accounting’, allowing banks to analyse transactions in real-time, means they no longer need to rely on data from profit and loss reports – usually ones that are months out of date. As a result, banks will be able to check credit scores quickly, making assessments and managing associated risks. This will provide quick and seamless onboarding and approval processes for loans, provisioning for the needs of SMEs.
Rather than generating quotes and approving loans in weeks, making use of ‘open accounting’ will allow these digital intensive banks to do so in minutes. By having more accurate and up to date information, banks will be able to better ensure compliance with changing regulation whilst managing the associated risks effectively.
How can smart collaborations create greater access to SME lending?
Banks cannot expect to be able to keep up with the best of bread in all parts of banking services provided – especially under the new open banking paradigm. With the brick and mortar financial services industry suffering as branches close, SMEs’ relationships with bank managers also suffer. However, let’s not forget that although these points of contact appear to be becoming more obsolete, they provided significant long-term value for banks, way beyond the value of loans. The knowledge and synergies that bank managers had, by helping SMEs manage their finances and by accompanying their growth, was tremendous.
A new digital approach of these points of contact is needed. Such an approach needs to convert the legacy relationship into a new digital one. This is where banks are able to get the most out of the new digital third-party ecosystems – if such parties are chosen wisely. Via these service integrations, faster, adaptable and more modular access to information can be obtained.
Today’s competitiveness in the lending market is already showing signs of such challenges, from peer-to-peer lending, crowdfunding and other innovative funding models, big banks must make an effort to team up smartly by analysing the integration possibilities with available third-party vendors. Enabling them to integrate their data in such a way that the SMEs’ customer journey can keep up to date with the evolution of their needs.
The banks that make such a switch to be digital, open, modular and connected by taking advantage of ‘open accounting’, will be better able to seize these new opportunities within the SMEs sector. This will place them in a better position to cater for the increasing expectations of SMEs, making use of single end-to-end processes of self-service digital lending and leasing products, loan processing and collection, screening and credit scoring.
However, ´open accounting´ and technology can only take banks so far. We must keep in mind that the new digital relationship should still incorporate a human side. These new digital relationships, also known as ‘phygital relationships’ involves combining physical and digital experiences –binding both the online and offline worlds.
Through harnessing open accounting, new technologies and adopting a phygital approach, banks only then will be able to adapt and change their legacy manager relationship. Creating a relationship whereby banks are able to understand and fulfill the needs of the future generation of SMEs.