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Banks giving ground on SME financing to challengers

Lionel Taylor, founder of the Trade Advisory Network

Banks are failing to address opportunities in the financing of SMEs and conceding that potentially lucrative ground to disruptive challengers, a leading trade body has warned.
“The finance world, which is dominated by the banking sector, is not immune to evolution,” said Lionel Taylor, founder of the Trade Advisory Network, a specialist consulting firm specialising in trade and supply chain finance. “However, its focus on regulation and its naturally conservative nature has until recently made it slow in embracing technological change. Where banks have embraced new technology, they have been more focused on increased efficiency gains than on any expansion of lending appetite.”
A focus on efficiency should be of little surprise with many of the banks’ more stable income generation activities, such as payments processing, becoming more commoditised and less profitable, said Taylor: “Also, banks have become subject to more stringent capital regulation and have, as a consequence, become more selective with regard to the segments they wish to serve and the financing solutions they wish to offer,” he added. “This constraint on their capital has led to criticism, especially in the provision of SME financing, where much of the disruption in the support of SMEs is being targeted by the non-bank entity.”
By contrast, he said, fintechs have used technology as a platform to offer smaller businesses loans or supply chain finance, both against receivables and in the support of supplier payments. As such, they provide small businesses with access to working capital often on an unsecured basis supported by other types of risk mitigates such as credit insurance.

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