Fintech has a role to play in SMEs' post-pandemic recovery

SMEs have had a rough couple of years. The uncertainty of Brexit has been hanging over many small firms, with 40% believing it will have a negative impact on their business (YouGov, 2020). Then the pandemic hit, adding further turmoil. Whilst some sectors like e-commerce have boomed, more broadly SMEs have been badly shaken. Profits have been slashed, customers lost, and numerous companies have had to furlough staff or resort to making people redundant. Together, this has diminished the growth outlook for many small businesses. 

SMEs are eager to recover, but it’s an uphill struggle. Many often rely on high street banks for loans and other financial support. Limited competition in the banking sector has meant that many of these services haven’t evolved for years and, in today’s macroeconomic headwinds, can no longer provide the much-needed relief. However, legacy providers have left a gap in business banking which, thankfully, fintech is now filling.

Underserved by outdated solutions 

While the innovation coming from large enterprises like Amazon is celebrated, SMEs are often the ones pioneering new ideas. Their size and agility mean they can pivot quickly and adapt to the times. This is best exemplified in how small businesses responded to the pandemic. Many who had never sold online, now use e-commerce as their main channel. Companies that didn’t enable employees to work from home quickly introduced remote working policies. Many even forged new routes towards profitability within a matter of months. 

Yet despite this agility, SMEs have long been underserved by their banking providers. The financial products available are out of touch with innovation and don’t address the needs of SMEs today. Broad brush outdated offerings have limited their opportunities and meant they haven’t been able to access the benefits of digital banking, such as tracking transactions in real-time or managing cash flow online. Additionally, the terms of corporate loan agreements have been unfavourable to the needs of small businesses. At a time when consumers are supercharging their finances with digital banking apps, investment tools and smart savings pots, it seems regressive for SMEs not to have the same convenience. 

The pandemic has put even more pressure on the small business community and SMEs are looking to digital challengers to fill the business banking void. 41% of UK SMEs have now adopted fintech to some degree for payments and banking services (Raconteur, 2020). As the fintech industry grows and offers more solutions, the number of SMEs turning to digital challengers will only increase. 

Fintech to the rescue  

While many great innovations are coming out of the fintech industry, there is a handful that will be critical to SMEs as they look to make up for the hurt caused by the pandemic:

1. Open Banking

Open Banking has promised to deliver more competitive financial services that are geared to the customer (business or consumer). While it is yet to reach its full potential, Open Banking is going to become a lot more important as the UK moves towards economic recovery. Open Banking is set to make SME financial services much more user-friendly. With institutions being able to share data more easily with fintechs, small businesses are going to benefit from a rich set of new products. This has wide-reaching implications as everything from invoicing to expense management will improve as new solutions geared to SMEs go to market. This will help reduce a lot of friction for SMEs and improve their day-to-day operations.

2. Lending platforms

SMEs have long put up with balance sheet lending, but this outdated practice isn’t addressing the demands of modern businesses. SME requirements around lending have changed. A company might want a short-term ad-hoc loan to cover a lull in the summer months or small cash injections throughout the year to bolster growth. This is impossible with legacy loan providers, but an area where new lending platforms can help. With these lending marketplaces, SMEs will be able to access products from many third-party providers and find the best solution for them. This will also extend to more complex lending programmes like equity solutions or finding VC investors, all of which will become easier through new lending platforms. 

However, the bounce back loans which many SMEs have been utilising during the pandemic are primarily available from legacy banks. While this is a setback for competitive lending, as the market regains an even keel, we’ll see more SMEs served by new solutions. 

3. Smarter digital payments

Finally, new digital payments initiatives will improve the way SMEs do business with their customers. Confirmation of Payee is one such programme. It ensures the person making a payment is inputting the correct payment information by sending prompts to the payer when they’re editing the payment details for new or existing vendors. Another is Request to Pay. Request to Pay allows businesses to request money from a customer via an electronic message and offers customers the flexibility to pay in instalments. Both tools will make digital payments smarter and help ensure businesses get paid on time without falling victim to customer errors. Critically, these tools will also act as an anti-fraud measure helping to tackle the digital crime which has grown exponentially since the start of the pandemic. 

Bridging the gap

There are plenty of challenges on the horizon for the small business community. With relief efforts predominantly stemming from the big four, the progression of the fintech industry has been temporarily stunted. SMEs are also saddled with more debt, making it difficult to grow as a business. Unwinding this debt is vital to the success of the wider community’s recovery plans. 

However, the gap in SME banking is being bridged thanks to fintech. As the fintech sector continues to push new innovations geared towards SMEs, everything from new lending products to smarter digital payments will help bolster recovery and ensure SMEs are better placed to bounce. 

This article was contributed by Charles McManus, CEO, ClearBank