A Level Playing Field for SMEs

SMEs are not served properly by data providers, credit insurers and trade financiers. This is due to the high fixed costs of customer acquisition, compliance, handling incomplete applications and relationship management which makes smaller, infrequent transactions unprofitable. The average SME, however good, desirable or competitive its products or services might be, is disadvantaged. This reduces customer choice and creates conditions for oligopoly, both bad for the consumer. Most governments and trade agencies recognise this but leave it to the  marketplace.

Providing loans and credit insurance is the province of large, global firms although barriers to entry are being lowered by technology. Lenders and insurers rely on data from the big data vendors who prefer such high volume customers and large corporates. The problem for SMEs is that to compete with larger firms, they need data at the lowest possible cost and as part of a structured process but can’t individually meet the volume requirement nor afford customised transaction management solutions.

For centuries, small businesses in the UK operated as ‘guilds’ (trade associations) undertaking centralised, bulk buying, sharing expertise, training and supply chains in order to be stronger and benefit from economies of scale. The trading platform is the modern equivalent: it can enable all firms, including SMEs, to act as a group in order to access data, risk management and other essential tools on a “pay-as-you-go, use-when-you-need-it” basis. This ‘democratisation’ empowers the SME and so levels the playing field.

Compliance data and business reports are essential for decision making. Vendors offer this through web interfaces which are cumbersome to use with data arriving in an unstructured way (e.g. pdf, arriving via email to desktops) and with no integration with user-oriented applications. This makes data harder to use when creating applications to credit insurers and lenders. Another inefficiency stems from the fact that a sale and purchase transaction with deferred payment and requiring credit insurance has as many as four actors all of whom require the very same compliance checks and business credit reports. This often means that buyer, seller, lender and insured, are needlessly paying for the same data within one transaction. Fine if it is a multi-million dollar transaction but not for SME sized deals.

Not being able to share compliance results among traders creates a further inefficiency: if each of 10 traders bought data on all 9 counterparties at a cost of £10, the total spend would be £900 (90 pairings). However, if they acted as a group and shared the data, the cost would fall to £100, a saving of £800. Now increase the number of firms by a factor of 100 and it is clear that the savings grow exponentially. Which, in the UK, is the logic behind having a Companies House, a Land Registry and a Driver and Vehicle Licensing Authority.

Fintech is no longer only about P2P lending. The sector has matured with hundreds of agile, highly- focused firms offering specific products and services for SME trade at low cost. It is now possible to integrate multiple business-critical services (e.g. compliance, business reports, credit insurance and funding) into a ‘full stack’ service designed for the trading firm and delivered from a web browser. The list of features needs to include:

• Find counterparty
• Ensure compliance
• Access credit report
• Close Trade
• Agree Invoice
• Insure non-payment risk
• Obtain funding

The service should be structured as an open ‘marketplace’ with shared data and supported by insurers and lenders. It should be hosted on a secure server with a well-designed user experience. It should be affordable by any company, irrespective of size. The time of the SME competing on a level playing field may just have arrived.