Banks are a necessary part of the small business landscape, a 2020 survey of SMEs by Statista found that 99% of SMEs work with a bank or building society. Small businesses are often extremely loyal to their bank, unfortunately, that loyalty is rarely reciprocated.
Banks rarely go beyond the bare minimum when it comes to supporting SMEs: products are designed for mass use, but poorly suited to the needs of any individual business. While banks are increasingly coming around on the need for technology and digitalisation, they are followers, not leaders in this space.
Why banks don’t serve modern SMEs
For an example of the issues with banks, let’s look at onboarding. Getting a small business set up with a bank is a frustrating, time-consuming experience at the best of times, and it’s made significantly more challenging by the inclusion of any changes, such as complex entity structures and special purpose vehicles (SPVs). The old-fashioned process often requires in-person attendance at a branch, even following Covid, and can take weeks.
Overall, banks are large, slow-moving institutions. They have historically been successful, and they’re reluctant to rock the boat as a result; innovation is risky, and banks like to play it safe. They’re wrapped up in legacy red tape and long-outdated processes, but every bank is in a similar position, so there’s no competitive pressure to do better. Unfortunately, the very loyalty that SMEs show to their banks also means that they have little incentive to improve.
FinTech’s enter the scene
According to the Federation of Small Businesses, SMEs make up more than half of all UK business turnover. This represents a remarkable opportunity, so it’s no surprise that entrepreneurs have leapt into action. Seeing a clear gap in the market, newer, nimbler companies have emerged specifically to serve the needs of SMEs.
Unlike the big banks, these businesses are eager to innovate and leverage technology to deliver a set of features designed to make life easier for small business owners. Compare the weeks-long process of signing up for a bank with that of signing up with a fintech - which is straightforward, takes minutes, and can be done from the business owner’s smartphone.
Over the past decade, these alternative financial services (AFS) have evolved from plucky start-ups to trusted institutions in the small business world. Providers have built out their ecosystems, ironed out early issues, and now represent a realistic alternative to the old banking giants.
What can SMEs do?
Every SME is unique, and each one has different needs from its financial provider. The first step that small business owners should take is to ask themselves questions about what they need from banking and expenses and the challenges they face. Often, this is something that SMEs have never seriously considered – the big banks are so well established, it’s easy to forget that there are other options or assume banks are the better one.
Many SMEs don’t actually need to work with a bank and would be better off with an alternative financial provider. For instance, modern payment providers offer many of the same services as a bank, yet are far more responsive and deliver a higher quality of service. In fact, many providers connect SMEs with a dedicated account manager from day one, making the transition over as simple and hands off as possible.
For others, a more tech-savvy partner may act as a supplement to the bank, adding capacity rather than replacing it entirely. Many businesses use the bank to store funds while managing them through a tech platform for greater insight into their finances. Combining a core banking solution with specialised solutions for the financial processes a business regularly needs – such as managing employee expenses, international payments, and foreign exchange – is well worth considering for SMEs which aren’t ready to ditch their banks just yet.
The future of SME finances
There’s no doubt that the entry of fintech’s and alternative financial service providers has spurred banks to improve their offering, but they still lag far behind. It could be years until they implement the quality-of-life features that every smaller provider already has. For that reason, SMEs leveraging new providers – whether instead of or in addition to a bank – will have a competitive advantage.
About the author: Simon England is Managing Director at Equals Money.
The high cost credit industry hasn’t been rocked by the reported demise of payday lender Wonga, it is just mutating, says financial expert Jasmine Birtles.
Birtles, founder of MoneyMagpie.com, says that high cost credit is alive and well in the UK thanks to continuing lax rules on lending rates and the desperation of vulnerable families, many of whom have been hard hit by austerity cuts and the introduction of Universal Credit.
“One gets a sense of schadenfreude seeing Wonga brought down partly by claims management firms - firms which also often use questionable marketing tactics to get their customers and then charge over the odds for their service,”says Birtles. “However, even if Wonga does go into administration, it doesn’t by any means herald the end of high cost credit. There are many over-priced lenders on the market, and more waiting in the wings, to take up the slack.”
Birtles is calling for a two-pronged approach to dealing with the lending crisis in the UK:
- Put stricter caps on how much lenders can charge in interest on any loans. Even though Wonga was forced to reduce its interest rate from over 5,000%, it is still charging over 1,500% now which is an insane rate for anyone to pay
- Make more money available as a Social Fund loan. It used to be that people in dire straits could get a quick loan, at no interest, to buy essentials for their home through the Social Fund. Hardly anyone gets one of these now. If the money were made available again it would stop quite so many people going to high cost lenders when desperate.
What it means for Wonga customers
Sadly, if Wonga does go into administration it won’t mean that current customers will have their debts wiped out. The administrators will take over the running of the business and will demand money in the same way as the company would have done before - possibly even more vigorously
What it means for the industry
It sends a warning shot across the boughs for other high cost credit companies but it won’t stop them charging over the odds for short-term loans. In fact it may even encourage other companies to ramp up their offerings to fill the gap.
Already there are companies doing well out of high cost credit:
- Companies like QuickQuid and Lending Stream offer very quick, short-term loans at very high rates. They haven’t been as much in the public eye as Wonga and, so far, have avoided the bad publicity that Wonga had in recent years.
- Rent-to-own companies like BrightHouse do a roaring trade in household goods which end up costing customers up to five times the original cost of the product.
- There has recently been a proliferation of high cost credit cards for people with poor credit, making it easier for people to spend with interest rates of between 27-35%.
(Source: MoneyMagpie.com)
