In 2018 we surveyed more than 500 SMEs, and found that without access to additional funding, 24.6% would have to cut employee numbers. 13.3% expected that the business would ultimately fail as a result. To dig deeper into these results, and uncover the causes and opportunities of financial exclusion, earlier this year we commissioned MagnaCarta Communications to carry out further in-depth research.

The second study confirmed that there is no one-size-fits-all solution to creating financial inclusion, because there is no single cause affecting all excluded companies.

In general, increased post-recession scrutiny on banks has hampered SMEs’ ability to access bank accounts and funding. Bank branches are closing, taking away local experts and personal relationships which have previously helped boost SMEs and start-ups.

As such significant employers across Europe, accounting for almost 70% of all private employment in the region, the growth and prosperity of SMEs is a matter of great importance for Europe^[1].

It is encouraging to see that some lenders are ahead of the curve, already providing dedicated solutions to better-serve companies where traditional banks have been unable to help. For example, PayPal has provided £1 billion of finance to over 37,000 small businesses in the UK since it launched PayPal Working Capital in 2014^[2].

Committed to change

During our research we found that there is a growing commitment from governments and financial institutions to improve access to commercial banking, transaction services and lending for SMEs across Europe. But with Europe’s SMEs covering every industry, with vastly different business models, distribution channels and ambitions, no two firms are alike. The multitude of issues at play means there is no one-provider-fits-all solution – neither existing corporate nor retail-focused offerings are suitable, so SMEs are being unfairly excluded.

There are plenty of ambitious businesses in the market today, each of which has specific financial requirements that could be met by an open, joined-up ecosystem. And there are plenty of potential providers of innovative solutions. But frustratingly, there remains a lack of connection between the two, beyond individual, ad hoc collaborations.

One interviewee during our research, Kent Vorland, CEO of SmartTrade App – which has created a platform for micro-businesses and sole traders – told us that the needs of smaller businesses are very specific, and few existing offerings meet these needs effectively. He said “We’ve seen consumer products try to attract SMEs, but they are not agile enough and have little knowledge of small businesses. On the other hand, the big boys have complicated functionalities, but nothing optimised for small merchants who often don’t have software knowledge and skills needed.”

Without access to suitable solutions, SMEs are faced with high prices and other barriers to entry which are stunting growth and limiting the appeal of SMEs to prospective lenders – it is a vicious circle of self-reinforcing inaccessibility. Change is, therefore, needed. And a more collaborative and creative approach, to build a mutually supportive ecosystem, could help SMEs thrive and improve their contribution to the economy.

Collaboration not competition

Many financial institutions traditionally sought to deliver a full service offering, every financial product a consumer or business could need. However, this leads to substandard offerings, with resources stretched too far. If institutions were to focus on developing the best possible version of one solution, working with other likeminded Banks and FinTechs, the collaborative solution would be far more robust, efficient and affordable.

The industry is at an inflection point. To move forward, all ecosystem participants must continue the conversation and work together, to build collaborative models and solutions that can fit this diverse and disparate market. Each provider brings to the ecosystem the solution they do well and utilises the solutions of others to fill the gaps and deliver a full suite of financial services.

If they can do this, it will help build a larger marketplace from which providers old and new can benefit. We have seen evidence that there are significant gains to be made by all participants. But rather than relying on top-down directives from state institutions, this needs to be led by forward-thinking participants, who can find and build accessible and inclusive solutions from the bottom up.

The full report, Financial Inclusion for Europe’s SMEs: Building a circle of trust, is available to download here.