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Micro, small, and medium-sized enterprises (MSMEs) employ over 70% of the world’s workforce, and their supply chains contribute up to 90% of global business. These organisations are projected to be key drivers of future growth and economic equality. At the same time, they struggle more than anyone to access finance: 

• Small and medium-sized enterprises (SMEs) make up 40% of all financing applications, but 70% of rejections. 
• 43% of small businesses in the US applied for loans in the last year.

SMEs are also disproportionately affected by the trade finance gap, making it much harder for them to expand abroad; SMEs in developing economies and those led by women bear the brunt of this issue. 

The MSME financing challenge: Market size and opportunity

The numbers tell a compelling story: MSMEs are projected to be key drivers of future economic growth and equality worldwide. In the United States alone, 43% of small businesses applied for loans in the past year, highlighting the significant demand for capital. Yet the trade finance gap continues to disproportionately affect smaller enterprises, particularly those in developing economies and women-led businesses.

This systemic inefficiency in capital allocation represents not just a market failure but a strategic opportunity for forward-thinking financial institutions. With 33% of SMEs indicating they expect to change their banking provider in the next two years—up from just 19% in 2017—customer loyalty is clearly at risk in this segment, as is the need for financial institutions to differentiate themselves.

Players of all sizes have recognised this opportunity, from the likes of JP Morgan, who recently announced a £50 billion investment in the private credit market and merged commercial and corporate lending operations; right the way down to smaller fintechs, particularly in markets like India, which accumulating market share by addressing the fundamental disconnect between what banks traditionally offer and what SMEs actually need.

The ‘expectation gap’ behind the trade finance gap

Research by BIAN, IBM, and IFC reveals a fundamental misalignment between banking offerings and SME expectations. SMEs are seeking:

• Seamless experiences across integrated platforms for both banking and non-banking services
• Trusted advisers who can assist with wider business planning and growth
• Streamlined access to capital with minimal bureaucracy

In contrast, traditional banks have remained largely inward-looking, focusing on risk management and internal productivity metrics rather than customer-centric innovation. This disconnect explains why non-bank financial institutions (NBFIs) have been gaining ground, despite their higher cost of capital.

Strategic solution: Simplified servicing

Announced at Sibos 2024, Finastra’s Loan IQ Simplified Servicing solution addresses this strategic challenge by enabling financial institutions to efficiently service high-volume bilateral and SME loan portfolios using the same enterprise-grade technology deployed by major global banks. Combining Finastra’s Loan IQ with a user interface optimised for high-volume lending would enable financial institutions to:

• Manage their entire SME lending portfolio in a single, integrated system
• Support diverse asset classes, including small business, business banking, middle market, asset-based, and project finance loans
• Scale down efficiently to accommodate micro-loans whilst maintaining operational excellence

For executive leaders seeking to capture market share in the competitive SME lending space, this innovation creates a more scalable lending operation without proportional increases in operational costs, improves transaction management, oversight, and reporting capabilities to enable better risk management across the SME portfolio.

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The SME financing gap represents both a challenge and an opportunity for financial institutions. With customer loyalty at risk and new competitors emerging, maintaining the status quo is not a viable strategy.

Modern loan servicing technology can be perceived as a strategic tool to:

1. Defend existing SME relationships by meeting evolving customer expectations
2. Expand lending capacity to capture underserved segments of the market
3. Create a platform for future AI-driven innovations in lending

For institutions committed to maintaining relevance and competitiveness in the evolving landscape of business lending, the time to address the SME financing gap is now. Modern loan servicing technology, like Finastra’s Loan IQ Simplified Servicing, provides the foundation to execute on this strategic imperative at scale.