By Eyal Nachum, Executive at Bruc Bond (formerly Moneta International)
Over the last several years the banking industry has been going through a transformation. Many of the changes are positive, bringing about a glut of innovative services and greatly expanding consumer choice. However, some changes are negatively affecting the small and medium enterprises (SMEs) that serve as the real backbone of the economy. Let’s take a look at some of the more significant shifts in the industry, their causes, what they mean for SMEs and what you can do to overcome these new challenges.
The financial crash a decade ago hit everybody hard, and the changes introduced during the recovery period have themselves been sometimes hard to swallow. Nonetheless, a few trends have emerged that we should keep in mind when surveying the international banking landscape.
A Shrinking Decade
One undeniable reality facing the world is that today the banking industry is smaller than it was ten years ago. In fact, it’s significantly smaller.
As part of the recovery from the financial crash, central banks around the world have maintained historically low interest rates. While the debate on the efficacy of this measure continues, the reality is that interest rates have never been this low for so long. Because European bank earnings far more dependent on interest income than their global counterparts, bank profits in the eurozone have been significantly hampered, and belts have had to be tightened. As a result, Europe’s banks combined are now worth less than Apple alone.
This has served to accelerate a process long in the making, with European banks trimming off excess fat and restructuring their holdings in the best case, and completely shuttering their doors in the worst. As a point of illustration, let’s look at bank branch and employee numbers in the EU over the last decade. At its peak in 2008, the European banking industry operated almost 240,000 branches and employed 3.23 million people. A decade on and the European banking industry is looking slimmer, with only 2.7 million workers running some 183,000 branches. These 16.5% and almost 24% reductions over a single decade in the respective numbers of employees and branches signal a major tightening of banks’ resources. In this reality, banks must either significantly improve efficiencies or reduce the scope of their work.
The SMEs Getting Left Behind
When we say that SMEs are the real backbone of the economy, we really mean it. Globally, SMEs account for 90% of businesses, two thirds of jobs and half of global GDP. The problem is that a majority of them struggle to get their banking needs adequately met, and the situation is only getting worse.
In the UK, between 2013 and 2017, the value of annual total lending approved for micro-and small businesses fell by almost 39%. Globally, SMEs depend to a dangerous degree on alternative means of financing and credit, including family, friends and moneylenders. A shocking 70% of micro, small and medium enterprises in emerging markets lack access to credit.
When it comes to payments and international transfers, the picture is not much brighter. Traditional and slow-moving banks have struggled to adapt to emerging business needs, particularly when faced with ever-increasing budgetary and personnel constraints. These prevent banking institutions from adequately exploring new business cases and profit models. Of course, an industry doesn’t survive for half a millennium by taking on every passing risk, but banks’ cautious approach lies in direct opposition to the needs of business in today’s fast-changing market.
The problem is greatly exacerbated by branch closures and personnel reductions. Bank managers used to provide significant value to SMEs with so-called “soft interventions”, which included helping SMEs manage their finances, avoiding the pitfalls of unmanaged growth and the provision of insight into micro-and macroeconomic trends that otherwise would have escaped their attention. More importantly, such contact allowed banks to intimately know their clients through a network of of branch managers who could utilise their knowledge and experience to assess SMEs’ viability and future prospects, giving banks greater confidence to take them on as clients.
What remains is a sector that is ill equipped to provide the services it is tasked with, but things could be changing in the near- to medium-future.
Tech and Reg to the Rescue
Globally, banks are well aware of the importance of SMEs both to the wider economy and to their own bottom lines. Despite their constraints, many are loath to lose such an important segment of clientele and are considering every option to improve their risk analysis in order to provide services to an increasing number of clients. The answer, they find, lies with technology and inventive regulatory approaches.
The opening up of the European financial industry to non-bank financial institutions (NBFIs) immediately allowed a great number of companies to provide added value on top of existing banking infrastructure, easing some of the pressures on underbanked SMEs.
NBFIs may provide crucial services to SMEs and end-point consumers, but do little to ease banks’ own worries of missing out on income opportunities and shrinking customer bases. To this end, the banking sector is becoming a leading adapter of artificial intelligence. The advantages of back-office and risk-analysis AI are innumerable, even if its application to financial services is still in its infancy. When the technology matures in the coming years, banks will be able to handle enormous troves of data on SMEs, allowing them to make smarter decision quicker, and to provide services to a larger segment of the market.
What Can SMEs Do?
Even if tomorrow we will be living in a fully-automated financial world, today SMEs still struggle to gain access to much needed financial services. Luckily, solutions can be found.
One possible avenue for SMEs is the growing market of NBFIs. These companies usually provide a limited subset of a bank’s traditional package of services, but there are advantages to this approach. Specialisation allowed NBFIs to really hone their skills, learn their chosen market segment and better assess risk. In turn, NBFIs are able to take on clients that wouldn’t receive a call back from a traditional bank, simply due to lack of interest.
Another avenue is to approach professional brokers and relationship management services, whose specialty is in forming connections with a wide array of banking partners, learning their risk appetites and business tastes, and, finally, matching prospective clients to a bank that’s right for them.