984. Insights: Are financial services still failing small businesses?

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0:44Small and median-sized businesses, or SMEs, play a vital role in economies all around the world. Yet they often feel undervalued and underserved in many areas. This is a topic we frequently return to at 11FS, and for good reason. So today we're exploring why this conversation keeps coming back, and what the industry can do to serve this crucial sector more effectively. I'm Benjamin Ensor, Director of Research and Strategy at 11FS. And in this week's episode of Fintech Insider, we're diving deep into the world of SMEs to ask how can the industry meet their needs more effectively and on a global scale.

1:23We're always banging the drum for SMEs at 11FS, and I'm delighted to be joined by a fantastic lineup of three SME experts who are here to help discuss how the industry can address the needs of these crucial customers more effectively. So first of all, we have a welcome return for Conrad Ford, Chief Product and Strategy Officer at Alica Bank. Thank you so much for joining us today, Conrad. Can you tell us a little bit more about Alica Bank and a little bit more about your role there? Hi, everyone. Yeah, so Alica Bank, for those that don't know us, we're a UK bank. We are a bank, it's a nice news to tell you this.

2:01We're a UK bank, and we're notable for our focus. We're very focused on a segment that we internally call established SMEs. So we'll talk a lot about SMEs clearly, but our segment is the larger SMEs, typically the employer means the number of people that have been around for a significant amount of time, which we think is a very underserved segment. And actually the proof point there is we are officially the fastest growing startup in Europe, believe it or not. So there is clearly a need for a bank to focus on that segment. On my own role, I'm on the leadership team. I've been here from day one of the bank coming back.

2:33I've got quite a wide dream there, but my core responsibilities are products, marketing and strategy. Fantastic. Well, welcome. I'm also delighted to welcome Robin Jones, who is co-lead at iWalkerPay. Welcome to the show, Robin. Can you tell us a little bit more about Iwaka Pay, and even if I've pronounced that correctly, and also about your role? Yeah, thanks very much indeed. Great to be here. You pronounce it perfectly, Iwaka Pay, as co-lead of Iwaka Pay. I'm focused on transforming B2B transactions in particular by providing digital trade credit solutions that benefits both suppliers and buyers.

3:15We launched in 2020 as an alternative payment option, as opposed to payment terms. In B2B transactions, we've made£100 million available in trade credit, and we've helped hundreds of suppliers and thousands of buyers with iWalkapay get that transaction done and offering the payment terms they deserve. Thank you and welcome. And I'm also delighted to welcome Hannah Sommer, Director of Go-to-Market and Strategic Partnerships at Liberus. Welcome to the show, Hannah. Could you tell us a little bit about Liberus and a little bit about your role there? Well, thanks for having me back. So, yeah, as you correctly said, my name is Hannah Sommer.

3:59I'm Director of Go-to-Market and Strategic Partnerships at Liberus. And my role is all about building strategic alliances and scaling out Go-to-Market efforts across regions. Liberals in general, like we're a global embedded finance platform, we're currently live in 15 countries, and we're focusing on helping small businesses access fast, flexible funding through our partners. And yeah, as I said, I'm very happy to be back in this podcast and chatting about small business finance. Well, wonderful. Welcome to you all. Okay, well, let's get into the discussion. Now, as I said, we've talked about SMEs many, many times on this podcast.

4:36But, you know, at 11FS, when we talk to SMEs, we often hear them complaining about some of the challenges, particularly the financial challenges of running their businesses. Setting up a small business is not easy. Running a small business is not easy. But a lot of business owners are spending time worrying about the finances and having to, to some extent, get distracted from the business of serving customers to sort of try and sort out their finances. For listeners who haven't listened to every episode of the podcast or who are not experts in this field themselves, I'd love to hear from the three of you about what you think some of the big unsolved challenges facing SMEs are.

5:13What are the things you're hearing from where SMEs are really struggling? Hannah, perhaps we could start with you. What are some of the things that you're hearing from most from SMEs where they're finding it difficult to get the services that they're looking for? Yeah, I think SMEs are like traditionally the massively underserved part of the economy. And I think what they're really struggling with is access to funding and access to fast funding in many cases. Because traditionally, SMEs do not have the massive liquidity. They don't have loads of money stacked away somewhere. And often they need to make very fast decisions that are going to make or break their business.

5:56So I really feel like they are the part of the economy which is like massively underserved, for example, also by banks, and they are massively struggling to get the access to growth capital that they need to accelerate their businesses. Robin, are you seeing and hearing the same sorts of pains or are you hearing other pains as well? Yeah, so what I hear quite often when I'm speaking to, particularly the suppliers, the sellers who work with iWalkapay, they're concerned about how things are, the uncertainty and the turbulence out there. So they're turning to solutions like iWokapay to give them that edge, to help them with some predictability, to help them sort of sell with confidence.

6:41But absolutely, certainly a tricky time out there for SMEs right now. And what are your views, Conor? Are you hearing similar things? So I guess my opening statement would be that FMEs are a classic 80-20 segment. So in other words, about 80 % of SME revenue or turnover is in about 20 % of the SME population. So the vast majority of SMEs, the 80 % on micro-businesses, they're individually very small, particularly one-person businesses, sometimes one person, or sometimes two people businesses. But they're individually extremely small. Typical turnover could be£50 ,000. It's that low. Although they're numerically a lot of them, collectively, they're a very small part of the economy.

7:21with only about 10 % of the economy. The 20 % of the larger estimates is the vast majority of its turnover. Now, the micro as a segment, the volume that's segment, is actually pretty well served by incumbent banking services because they're very similar to consumers. They're very consumer-like. And fun facts, their favorite form of finance is a personal credit card or marketplace. So they've kind of gone through the same journey with the incumbent banks as consumers have, which is they've been pushed into digital services to reduce servicing costs but generally speaking fairly competently. It's the 20 % of the medium-sized businesses that really struggle with the incumbent banks because they have much more complex needs and as they've been pushed into call centres and pushed into digital apps, their complex needs have not been properly reflected.

8:07And they used to be able to solve that through relationship banking, through branches, and that's been taken away. So really, there's kind of an acute, typical sphere for the challenges that a vast means have. It tends to be the businesses that have reached a certain level of complexity and scale, at which point traditional banking models kind of worked out. Because we used to sort of talk a lot in the industry about, you know, how the banks were sort of letting down the sort of smaller and the medium-sized businesses in particular, as you say, and how that part of the economy was underserved.

8:38Is that still the case because of the rise of so many sort of alternative providers, digital banks like yourselves at Alacur and so on, that would actually, to some extent, we've seen fintechs coming in and filling some of that gap. I mean, I think in Conrad, you're obviously going to say yes, because obviously you'll be part of that. And so, too, Robin and Hannah, but maybe Hannah, I mean, does the sort of failure of the more established banks to serve those sort of larger SMEs, the mid-sized firms, matter so much now, precisely because we're seeing other firms coming in? Yeah, I think it's really a mix of both because the reality is, yes, we are seeing, you know, alternative finance providers coming in, embedded finance platforms like Liberace coming in.

9:26But the reality is a lot of SMEs are still, you know, they're still very loyal customers to their banks. And not every bank is collaborating with the likes of alternative finance providers or embedded finance platforms. And I think that's where that gap, you know, exists because the SMEs love being with their banks and that's fine. But some of the banks, I think we're not as fast as we could be in terms of like collaboration with banks to give access to funding, for example, for SMEs that are loyal banking customers. And that's where I really see a huge gap, but also a huge opportunity. Hannah, you've mentioned speed a couple of times and I want to bring Conrad in on that point because, Conrad, we had Richard Davies, your CEO, on one of our recent Insight shows talking about how Alica is trying to prioritize digital first loans.

10:25And I believe a big part of that is obviously just trying to be faster. To Hannah's point, Conrad, how important is speed? How important is it to get funding decisions quickly? Is that crucial or not? Yeah, but probably not the levels of speed you expect me to talk about. So you're probably going to tell me, well, probably when people talk about speed, they're probably thinking of consumer language or money in your account in a minute. the reality is well-run businesses they don't need that right and they tend to know if they need money if they're going to if they're going to have a tight paywall in the amount of time they can know that in advance um the problem is um to the core of SME lending the incumbent banks are extremely ridiculously slow um so we're talking months to be clear here so so so just breaking down the SME lending market so here in the uk there's about a quarter of a trillion pounds of resume lending in total so 250 billion pounds um two-thirds of that is to put against property so business properties like fractures warehouses etc when you include secured against other physical things like machinery and trucks you're talking 80 90 percent of all of me lending is is tangibly secured that core of the market is extremely slow moving so a typical income back will take a couple of months to make a decision uh and the problem statement here is that let's So you're a well-run business that's been waiting to get a larger premises from the outskirts of your hometown because you've been growing so quickly and someone comes on the market.

11:53You can't wait two months to put an offer in. These are entrepreneurial businesses that need to move at a certain pace. They don't need to make an offer or get the money in a minute, but they certainly need to get it in less than six months, which is what income is like. So and actually, there's really no excuse for that. when you break down the steps of what a bank is doing when it's deciding to lend against a business's new premises. And there's probably a couple of hours of work going into that. So how they need to string it out over two months is crazy. It gets quite task-grist, by the way.

12:23So businesses get asked for up-to-date management information because the stuff that they provide before is out of date and it's out of date because the bank's sat in it for two months. So it gets really quite crazy. So businesses in our segment of mature crime businesses, They don't typically need money instantaneously, but they do need money that moves at the speed of their business and of their real skills. So a decision in a couple of days is that there's plenty good enough. And there's a larger ticket stuff like where it's a bioconcist, but only the incumbent's a model of the brainer. Thank you.

12:56May I quickly jump in here? So basically, I completely agree on the higher ticket stuff. But what I'd really like to add here, because obviously SME involves a huge range of businesses. And we're talking the one-man band coffee shop, as well as maybe a sort of medium-sized family business. And I would agree with the higher ticket deals that speed might not so much matter. And it's more the customer service and so on. However, what we're seeing, and this is true across all the 15 countries we're live in, is that speed actually does matter specifically for the smaller businesses. And because some of them are actually using the funds to cover payroll or to cover invoices because they just don't have as much money as stacked in their bank account.

13:50So I think like for the, yes, it's true for the bigger businesses that speed might not be as interesting. But for us, like the reason why SMEs are taking liberous financing and also are returning to us repeatedly is the speedy access of funding. And, you know, we can offer funding in minutes for certain amounts. Obviously, that gets different, like the second you get above certain amounts, depending on the jurisdiction you're in. But that is like speed and access to funding is definitely something we're seeing as very, very important for our customers specifically. Thank you. Robin, what do you think?

14:30Do you think the situation is getting better for SMEs in general? It is getting easier for them to get financing gradually over time or not? I mean, you know, there's some important points about the sort of segmentation and different SMEs and so on, but what's your view overall? I think overall access to financing for SMEs is probably growing with the increase in alternative lenders in the last, especially in the last 10 years in the UK. So, you know, I think probably the big problem is awareness. I think we ran a poll last year and I think we found just about one third could name an alternative lender.

15:12Um, so I think what it is, is those, uh, SME businesses, maybe they used to, all familiar with the high street banks, the bank they maybe use for their personal current account. Maybe they're a little bit apprehensive about trying these alternative lenders for the first time, but maybe when they do, they find that they have a really nice sort of tailored, uh, uh, solution to their needs. Uh, and they find they actually do get the customer service and the speed that perhaps they might need. So, yeah, I think overall the landscape is looking really good for SME lending. Really in the UK, it's looking really up, yeah.

15:48We're talking about lending, or I'm talking about lending in a sort of very broad way, as if it's all sort of one thing. But of course, there's lots of different lending. There's not only different types of lending, but there's lending for sort of different needs. There's sort of the short-term cash flow type funding. And then there's the longer-term sort of investment that could ultimately even be equity rather than debt. And one of the things we hear a lot when we talk to SMEs is particularly the larger ones, sort of to your point, Conrad, about the differences between the larger and the smaller and the micro, but particularly the ones that serve other businesses, often really struggling for cash flow.

16:24Because if you serve businesses or you serve the government in the UK or in many, many other countries, you get paid after 60 days, maybe after 90 days. If you get paid at all, you get paid late. and that creates huge issues um how is so are we seeing better solutions for things like cash flow um financing i'm actually maybe i'm going to throw this one back to you to you robin because um i think part of what you're doing is related to sort of that to what extent are we seeing so cash flow financing getting better and becoming easier for small businesses who may be you know importing or exporting goods and they've just got long cash flow cycles how much is that part of SME financing improving yeah I think that's exactly what Iwaka pay is is our mission essentially is to as I mentioned to help sellers get paid so they're not waiting those 30 60 days perhaps what they write on the invoice what the terms are we all know some buyers are going to take longer than that to pay so that makes it very unpredictable in terms of cash flow so you're sitting and waiting and then you might have to sit even longer and wait even longer and let's not even get into bad debt.

17:35So that's where Iwakape really helps. You get paid up front. You don't have to worry about any of the risk and the buyers are hopefully going to become more loyal because they are accessing trade credit terms perhaps again they're not accustomed to. So they're really grateful that they can do that. So it's a really nice solution for everyone involved that you know get paid up front improving the cash flow of both businesses that are involved in a B2B transaction. If I could just chip in on that, I think one of the untold stories about SME lending is the elimination of overgrowth, what it means.

18:08So the story behind this is that prior to the global financial crisis, the incumbent banks, which is true in most Western territories, by the way, the UK is an extreme example, had kind of gone too far with extending overgrowth to small businesses. You have situations where a business might have an overgrowth that's half the size of turnable which is just untenable for as a working capital facility after the global financial crisis that is overgraphs just got eliminated to enormous scale so in the uk they went from something like 30 billion to 5 billion um and partly it's because the banks have learned the lesson partly capital requirements would change to make it less attractive to those guys what that meant is these ordinary established businesses used to have that kind of facility they could draw down on so through a hotel in the UK, terrible time of the year, it's March, just before the season kicks off again.

18:57You'd go into your overdraft or you're a shop, you'd go into your overdraft prior to Christmas to fight stock. The overdrafts have taken away and a lot of the boom in digital lending to SMEs has been driven by the fact that those overdrafts aren't there anymore. It's an enormous problem. And many, many times the customer has taken any solution to get the cash to get it through that period because the overdrafts are used to be there. And whoever reinvents the overdraft and finds a way to bring it back cost effectively and capital efficiently and will change the world because it's a brain-born part of the market.

19:28Yes. I suppose to your point, it may not be an overdraft. It may be a different type of financing. I want to pick up on a point you made, Robin, a couple of minutes ago, where you're talking about the low awareness of alternative funding providers in the UK and by extension in many other countries as well. Hannah, do you see any ways that, you know, the industry can address that? Because you do have, you know, in many countries you have a variety of new finance providers trying to come into the market, trying to improve things from SMEs. But SMEs who are busy running their own businesses often haven't heard of these firms.

20:05Clearly every fintech would like to have an enormous marketing budget and do huge campaigns. But in the real world, how can firms kind of overcome that? and sort of alternative capital providers, new banks and so on? How can they get the word out to small businesses? I think that's a really good question. And if I had the perfect answer for it, we would probably be doing it. But let me try and give you sort of my view. And I think it's, as I said, like every single time it's about financing. It's a trust thing, right? And I think this is where partnerships come in. and are super important because the reality is, let's take Liberis as an example, Liberis might not be known to a random SME in Germany or in the UK or in the US or any of the countries we live in.

20:58However, the names of our partners are known to them because they are already in a business relationship with these SMEs. So I really feel like that sort of wide labeling and collaboration between, one, companies who have access to SMEs and who have longstanding relationships, and then, on the other hand, companies like Liberis, who can offer alternative financing, who might be able to serve SMEs that might not get access to funding through traditional methods. These partnerships are absolutely crucial, and I think what we do, for example, a lot is that together with our partners, join partner events, talk.

21:43For example, I was in Frankfurt like a couple of weeks ago to talk about financing or about our products to the partners and SMEs of our partner, if that makes sense. Because that creates that sort of trust, the fact that it's not just an unknown brand or name standing there talking about a product, but really backed up by a huge brand, for example, a big acquirer. Thank you. Robin, are you also using partnerships or have I misunderstood? Yeah, not so much in iWalkaPay. I guess our partnerships are with the suppliers, the merchants that we work with. So you could think of that as a partnership in a way.

22:23You know, we partner with these merchants on a long-term basis. They will embed iWalkaPay into their systems, into their checkouts. Their staff will be able to offer iWalkaPay. So it becomes very much embedded into their own business. And in turn, they offer that to their customers. And so absolutely, these partnerships we form with these merchants are so important to us and important to our success, but equally to them as well. So we work hard to understand their needs and understand their customers as well. So those are the type of partnerships we're running in Iwaka Pay. Thank you. Conrad, you made a really interesting point a few minutes ago about overdraft.

23:07the sort of glut of overdraft financing and that, you know, 10 years ago, 15 years ago, there was always too much overdraft financing available for some companies. How do you think about that sort of risk now that, well, probably not for the sector as a whole, but for sort of individual businesses, you know, any provider might end up almost lending that business sort of more money than it can absorb or, you know, lending too much money for businesses that maybe are not that successful. How do you think about and manage the sort of the risk and of how much you lend to individual businesses? And I realize that's a big and complex question.

23:43Yeah, it's a good question. So, I mean, my starting point, you kind of touched on this already, it's fundamentally different debt that's around long-term investment in the business versus day-to-day working cash or cash flow, but two fundamentally different things. And you can easily use the analogy of household finance, to say that. Your mortgage for the vast majority of us, by far the biggest piece of debt that we ever incur, if that was paying 20 % APR, then we'd all be bankrupt by Wednesday. So the margins on mortgages are very, very low. Sometimes you get a mortgage below the bank and the base rate, believe it or not.

24:24So the margins are extremely low, but that's made up by two things. Firstly, they're very long term, so the lifetime value of the mortgage is substantial to the financial services provider. And secondly, it's heavily secured. So in other words, as a financial services provider, you own the house. It's really no different in the business world. We have commercial mortgages, ordinary consumers have residential mortgages, consumers have car finance, we have asset finance and trucks and machinery. So it kind of works the same way. These are long-term investments. They're well as low margin. And your tolerance for credit risk is very low because the margins are low, just as they are in residential mortgages.

25:05It's fundamentally different short-term cash flow. A well-run business might need a cash flow facility of maybe two months turnover. It's a good rule of thumb. So they may need it for seasonal trading, for example, or payroll or VAT bills, which would happen on this basis. So these are much smaller parts of the overall debt base of the SMU. but should be. Therefore, they can afford a higher margin and margins need to be higher to justify it for the lenders. What you'll generally see if you can find is that the secured lending is dominated by banks, whether it's the big incumbent banks or challenger banks like us.

25:45And actually here in the UK, challenger banks like Alica now represent about 60 % of investment lending. Big banks were about 80 % or 90 % years ago, so it's fundamentally changed. Whereas the non-bank lenders, because it's higher margin, will tend to be more dominant in the cash flow finance and that's two very good moments. So it's just the major players. Thank you. Okay, we'll just take a very short break here and we will be back in a moment.

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26:43Welcome back to FinTech Insider Insights. In the next part of this podcast, we're going to dive into what the future looks like for SMEs and how FinTechs can help them tackle some of the more complex challenges and serve some of those gaps that we were talking about. So one of the things that I think has been really interesting about small businesses over the past decade is that the market's sort of changing from a small business sort of lending or borrowing market where small businesses were seeking financing to really a much wider small business services market where digital providers are offering a variety of different services to SMEs are starting to integrate those through digital platforms.

27:29And we're on that journey, and I'm not saying it works perfectly and that every API integrates perfectly with every other API. Of course, it doesn't. But we're seeing a shift in how things work. So, Hannah, I'd like to come to you first to think about embedded finance and whether that's part of how we might improve cash flow because as we see more small businesses moving to digital accounting systems moving sort of erp systems and so on um do you see that as an opportunity to serve smes better can you tell us a little bit about um embedded finance because a lot of talk about embedded finance a couple of years ago and then people have you know gone a bit cool on it particularly because we've had a number of fiascos in the united states um largely unrelated to the model as a whole.