Banking On Change

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Reveals the opportunities for financial institutions to step in and help fill the gap in banking provision for online SME merchants.

It is hard to comprehend simply how much has changed in the past decade, in business, in banking, in globalisation, in politics and economics – before the planet was locked down to fight a worldwide pandemic. Of course, 10 years ago i was in the midst of a very different global crisis – in finance instead of health. What the two events share is the effect on smaller businesses, and the clarity that they each highlighted failings or gaps within the banking and payments offering.

Back this year, the economy was dominated by cash and cheques, 19% of people were built with a smartphone and only 10% of European SMEs had a web-based order[i]. Accounts, invoices, statements and calendars counseled me on paper not digital, not to mention inside a slick smartphone app. Instant B2B payments were a distant dream. Cross border transfers an expensive luxury often only accessible to bigger businesses.

When a lot is different in this short period of time, exactly how should we predict the shape in our reality in another 10 years? It appears as though COVID-19 has accelerated change, forcing businesses to adopt digital strategies far sooner than they had planned: increasing online capabilities, adjusting to homeworking, accepting new digital payment types, joining online marketplaces to achieve more customers.

One thing we are able to say for certain is that payments have not kept pace with the change we've already seen, let alone what we should expect within the coming months and years. In another decade the current offering will be much more outdated and inefficient, excluding more businesses than ever before. Something must change, also it needs to change quickly to keep up with the flexible, innovative SMEs they serve.

Identifying what needs to change, and how

In 2022 we spoke to a lot more than 500 SME online merchants to find out what banking services they use and also the pain points they experience in payments and accessing funding. This year we repeated the research but expanded it to include 1,500 SME merchants across Europe, to assess how the landscape for use of payments services and funding is different – and how the image varies across different European geographies.

We discovered that the challenges go on for most smaller merchants, and opportunities remain for payments businesses and banks to part of and supply methods to help these vital economic contributors to prosper, whilst simultaneously boosting their own revenue.

Key indicators, key opportunities

In the 2 years between studies, there has been a shift in the number of UK merchants with separate banking relationships for different geographies. In 2022 3.2% of respondents had separate banking relationships in each and every region in which the business trades, in 2022 that figure has risen to 17.2%.

Whilst this does of course reflect the development in international trading, additionally, it implies that smaller businesses find it hard to locate one financial institution that may meet all their cross border banking needs. This is underlined through the drop in SMEs using only one bank for those countries by which they trade: 43.9% in 2022, down from 61.9% in 2022.

These two years also saw noteworthy alterations in the reasons behind business borrowing. Increased global ambition saw more SMEs seek a company loan, with funding for international expansion accounting for 27.5% of loans in 2022 and 33.9% by 2022. However, the most dramatic and indicative increase is viewed in the have to borrow to cover business costs and payroll. In 2022, 9.2% borrowed to cover payroll and 9.9% to cover business costs. 2 yrs later, 23.5% of UK SME merchants needed additional funding to help keep paying staff, and 32.8% would have been unable to pay business costs without external financing.

It may be worth highlighting here those we surveyed were inspired to exclude any requirement for funding that was directly linked to the COVID-19 crisis. Therefore, this reliance on external funding to cover basic costs existed even before business was limited or suspended because of national lockdown restrictions, showing that it's a longer-term issue as opposed to a characteristic of the current crisis.

In other European regions, an average of 23% have borrowed to cover payroll and 26.5% for business costs. SMEs based in The Netherlands were probably the most prone to have needed help covering payroll and – after British firms – German businesses were the most prone to seek funding like a short-term solution to cover business costs .

The implications associated with a inability to gain this extra funding could be disastrous for a small business. In 2022, merchants in the UK said they'd need to let employees go , and the business could fail without funding. In 2022 these scenarios were much more likely, with 28.7% of SMEs saying they would need to make redundancies and 21.5% fearing the company would fail.

The wider European picture isn't much better. 30.6% of German respondents said a lack of additional finance would lead to redundancies, and 28% each of Dutch and Nordic SME merchants would expect the company to fail as a result. French businesses were the least likely to need to let employees go, but with 19.9% saying it was a likely outcome, that is little comfort for their employees, especially as 21.5% felt the business would ultimately fail.

Cross border payment pain points

We live in an ever more digital global market, where consumer or business buyers can purchase just about any service or product from anywhere in the world in a few clicks, with little regard for details such as FX rates. Within this highly competitive landscape it is vital that smaller businesses can stay competitive and successful by transacting quickly and seamlessly across borders. Yet our research shows that lots of SMEs have observed significant challenges when attemping to gain access to cross border payments from their banking partners.

Across all regions, 36.9% struggled with high fees and 31.6% faced delays due to slow response times . Poor FX rates caused issues for 27.3% of respondents, along with a poor digital experience caused 26.4% to faulter. 21.6% experienced poor customer service and a lack of understanding of the items the company required.

Filling the gap

The world of global digital commerce is a growing rapidly sector; but it is additionally a sector where entrants face multiple barriers to function because established financial institutions possess a fear of the unknown.

However, banks and payments providers already supporting the online merchant space can deliver a genuine added value by giving their merchant customers with fast, inexpensive banking services including international bank accounts and access to crucial funding. In the present climate, taking tentative steps from the COVID-19 lockdown, that support will probably be more valuable than ever. Indeed, for financial institutions that demonstrate a real knowledge of SME needs there might be a substantial long-term gain.

Clearly this is the time for that financial services sector to step up, and also the financial ecosystem model remains strong. Banks or payments businesses working in silo have limited positive impact as resources are dispersed too thin. But cooperating within a financial ecosystem, those institutions that focus their resources on developing and delivering solutions within the areas in which they're strongest, dealing with other providers to build a suite of tailored and high quality services, can deliver better solutions to those SMEs who need it.

Today's financial institutions – from traditional incumbent banks to payment businesses and FinTechs – possess a unique opportunity. They can part of to help online merchants bounce-back, succeed and prosper with techniques they couldn't imagine a few short months ago when the world would be a different place.

Key findings from the 2022 research:

Cross border banking is really a challenge

Across the European countries surveyed, an average of 19.2% of online stores have separate banking relationships in every country in which they operate – contributing to their costs and resources to manage

2% of UK merchants have separate banking relationships in every country in which their business trades
44% of UK merchants use only one bank for the countries where the business trades
2% of companies in the Nordics are the most likely to work with separate banks in each jurisdiction
9% of French merchants work with multiple banks
3% of Netherlands firms use multiple banks

Banking services utilized by online merchants

Around half of online stores surveyed said they will use short-term loans , overdrafts , and finance agreements for specific purposes
2% access settlement accounts for cross border payments from their main bank
35% use their bank for foreign currency services
German merchants are least prone to access solutions to help with cross border trade, with the lowest
proportion of respondents accessing settlement accounts and FX

Accessing finance – how long will it take?

Online merchants reported that accessing business finance had them as much as Six months:

8% said it took 1-2 weeks
6% – 3-4 weeks
7% – 1-2 months
16% – 3-4 months
6% – 5-6 months