What Banks Can Mean to SME’s in Their Day-To-Day Business, and Vice Versa?
By Bruno Gremez, Co-founder of Fincluziv, Smart Fintex and CT&F, ex-ABN AMRO and BNP Paribas.
I have already written about the difficult access to financing for SME’s in the UAE, which is mainly explained by the reluctance of local banks to finance SME’s that they generally perceive as too risky.
This is very unfortunate in a country where SME’s contribute to around 50% of the GDP. This situation has increasingly drawn the attention of local authorities, which are exploring various solutions to this important issue, especially at a time when the leadership of this country wants to promote an increased diversification of the economy.
While a number of local banks may already be rethinking their strategy towards SMEs in an attempt to address this issue, many of these banks could also, in parallel, explore the possibility to support SME’s in their day-to-day administration. This would be risk-free and potentially rewarding.
As Seow-Chien Chew, Partner with Bain & Company recently explained, most SME’s dedicate their scarce resources on running and growing their business. That leaves them with limited means to deal with their day-to-day administrative burdens.
That creates an opportunity for local banks to play a key role in providing integrated digital solutions for their administrative work. Examples could typically include payroll and accounting services.
In today’s digital era, international banks increasingly help SME’s by not only effecting monthly salary payments to their employees for instance, but also by reporting related data and by enabling a smooth digital integration of such data into the SMEs accounting system.
The benefits for SMEs are huge. It makes them more efficient in their accounting. It allows them to save on resources used in their accounting and back office, and dedicate their efforts on the development of their business. It can also enable them to improve the reliability of their reporting and to become more transparent, hence more attractive, to their banks.
Banks can also greatly benefit from such solutions. First, banks can charge fees for such services and increase their clients’ revenue base. Second, and more importantly, banks can build closer relationships with their clients. By providing such integrated solutions, banks will collect data on their clients and increase their understanding of their business.
Improved client’s intimacy often enable banks to build more sticky relationships with their clients. Indeed, banks will be in a position to use data collected on clients to also provide other services and further increase revenues. Eventually, that may even help them finance those SME’s in a less risky way.
At the end of the day, lending risks are always related to some of sort of perceived asymmetry of information. Usually, banks are reluctant to fund their SME clients because they do not understand their business sufficiently. The more reliable information banks can collect on their clients’ business, the less risky these clients will be perceived by their banks, and the more comfortable banks will be about financing them.
Bain suggest that banks willing to pursue this avenue should do so by adopting a sectorial approach. I strongly believe in that strategy. If local banks in the UAE can combine sector knowledge with tools to help SME’s in their day-to-day admin, they will improve the quality of the integrated solutions they provide to make sure they correspond to the business reality of these SMEs, and that will increase the intimate knowledge that banks build on their SME clients.
Every problem is a source of opportunity. I can only urge banks in the UAE to take this opportunity very seriously to improve the business of their SME clients and, at the same time, increase their understanding of their clients’ business, and eventually their risk appetite for SME lending. But the key will be to properly use and optimise data collected. In today’s world, data is gold!