The Starving of SMEs   

Like many of my industry colleagues, I have been passionate about the financing of SMEs, who are the true lifeblood of global trade. Banks, like most businesses, only have time and resources to service the top 15% of their base where the large percent of their revenue comes from. In recent year's many of the regulatory concerns and processes that have been placed on the banks are directly responsible for curtailing the banks ability to extend services to their SMEs. Banks are always made to look like the bad guy in the Wall St. versus Main St. arguments, but regulations have made it more difficult for banks to service and attend to Main St. (i.e. SMEs) and forces banks into the Wall St approach where only big counts. The issues of on-boarding time, KYC regulations and risk management have made it financially difficult for banks to justify the business case for investing in SME lending and financial services. Short sighted and poorly constructed regulations that do not considered SME impacts are more to blame than the banks. A recent example of this is HSBC closing thousands of SME accounts and abandoning those clients without any option, please read: http://bankinnovation.net/2013/12/revoke-hsbcs-banking-charter/

Governments and Regulators have forced the banks to abandon their SME clients by effectively making the cost to provide banking services to the SME segment a losing financial business, causing the creation of the "Missing Middle". It is fast reaching the point where the cost of on-boarding, KYC and Credit/Risk diligence costs substantially more than any bank can hope to make in fees from an SME over even a period of years. Additionally, this is a time when banks are under pressure to make up for lost revenues from their payments and credit card business that has seen regulated fee reductions. How are banks going to be able to increase their SME business, or even maintain the SME business that today is not seen as profitable. One way of course is to raise the fees that an SME will pay for those same banking services that they get today.

I find this really very counter productive to the growth of both the local and global economies. We hear that the SMEs are the growing and driving force to expanding economies. Governments spend large amounts of money on programs to encourage growth from the SME segment. In the U.S.A., U.S. Ex-Im Bank's Charter provides that Ex-Im Bank makes available "not less than 20%" of its lending authority to small businesses. Sad to say, there are years where Ex-Im does not meet this 20% lending threshold for SMEs. Probably with the exception of Germany, governments have not been efficient in delivering working capital where it matters most: to entrepreneurs and innovators that export. U.S. SMEs, when they do export, sell mainly to two countries, Canada and Mexico. In comparison, German SMEs, the "Mittelstand," sells to six countries on average. The benefit is that Germany SMEs help to keep unemployment noticeably lower than the surrounding countries and are a contributing portion of the German trade balances. Many banks are retreating from trade finance, while German banks put working capital in the hands of SMEs and encourage to most innovative companies in a low risk manner. This is a lesson and an example in the success of Germany with their SMEs that should be the prototype for the rest of the world.

One of the first steps that a bank can take is to provide supply chain finance solutions to their own SME clients, buyers and sellers that do business together. The challenge and cost of on-boarding, regulatory KYC and credit has already been done and is no longer a consideration. To do this the bank will need to mine their data for connections, such as finding payments between two bank corporate clients. This is just one easy way to find your clients that have a business relationship to each other. Once the bank discovers those clients that are buying and selling with each other, it's a no-brainer to offer both clients supply chain finance regardless of their size. This would enable the buyer to stretch out payment terms while the seller gets accelerated payments. The bank gains' financing revenue and fees, but more importantly, the value is in helping your own clients to grow assisted by you, their bank. This is Customer Care, which is proactive client servicing versus Customer Service, which is inactive or at best reactive.

Wouldn't this put your bank in position to be the bank for SMEs?