What will the European SME lending market look like in 2030?

The SME Finance Forum, managed by the International Finance Corporation (IFC) of the World Bank Group, works to expand access to finance for small and medium businesses. The Forum operates a global membership network that brings together financial institutions, technology companies and development finance institutions to share knowledge, spur innovation and promote the growth of SMEs.

Intesa Sanpaolo has been a member of the SME Finance Forum since 2017 and participates every year at the Global SME Finance Forum, which brings leaders from commercial banks, development finance institutions, fintech companies as well as regulators to lead conversations on the state of SME financing.

At the Global SME Finance Forum 2020 - Virtual Edition, Intesa Sanpaolo Innovation Department participated in a public "Call for Insights" with a short article on the topic "What will the European SME lending market look like in 2030".

The article highlights that the innovation of financial services towards a fully digital dimension will become increasingly rapid, involving all market players, including traditional banks.

Despite the difficulties in imagining the credit market in 2030, it can be expected that it will include a variety of players in addition to banks, independent or interconnected in complex networks for better management of risk and portfolio. The combination of players, technology and changing needs of SMEs will be transformational, resulting in more creative and dynamic lending offers. Banks will play a central role in that field, on condition that they can keep pace with digital innovation.

Read the full article below.

 

What will the European SME lending market look like in 2030?

In the past years we have experienced a burst of innovation in the financial industry. Today, the SME lending market is attempting to meet the challenges resulting from the global pandemic. Lives have been disrupted on a scale that nobody could have anticipated. If digitalization is the way to meet new business demands, can we anticipate a fully mature digitalized lending market in 2030 with credit providers and SMEs fully and effectively involved?

The digitalization of financial services for business customers trails behind retail solutions. So there are huge opportunities in the SME segment, which is a fundamental part of the Economic European ecosystem, employing more than 66% of the workforce and contributing to creating more than 56% of the EU economy. In the next ten years, the number of SMEs could increase by 16% compared to 2017, thus increasing the demand for financing.

However, SMEs are also the most vulnerable part of the ecosystem as barely half of them survive their 5^th year of existence. This vulnerability is enhanced by the combination of their size and fragmentation, as well as the complexity of their needs. Lack of internal skills and insufficient cash tend to slow down the adoption of business digital solutions which are essential for surviving the emergency. Only 34% of SMEs have adopted Enterprise Resource Planning systems, while only 3% took advantage of analysing their own Big Data in 2017. The digital lag of SMEs prevents them from reaching customers remotely and therefore challenges the sustainability of traditional business models.

That said, we will focus on three main challenges and/or opportunities that might shape the future of SMEs and the lending market:

1. Alternative lending
2. Technology
3. Open banking

 

Alternative lending

Whether today or in 10 years, credit providers will always be essential to the restoration of economies caused by crisis. After a phase of easy money from Governments, Banks could eventually apply even stricter criteria for accessing credit to avoid an increase of non-performing loans. An increase in the loan rejection rate will hence push SMEs to look for alternative lending, while also re-evaluating their business models.

In recent years, many FinTechs have entered the lending market, pushing the advantages of speed and service simplification. New models have been created such as peer-to-peer lending, crowdlending and lending as a service, thus opening the market to non-financial entities.  E-commerce and merchant financing have given BigTechs the possibility to enter the playing field too, capitalizing on their tech advantage and vast customer database. Although Banks have been the major providers of SME funding in the EU market so far, alternative lending is becoming more and more appealing.

Technology

Cloud computing and the next generations of mobile technology will accelerate the use of digital solutions across Europe: big data will rise in volume and quality pushing AI solutions further. Today we are still unable to analyse unstructured data efficiently. However new algorithms will help us achieve this opening great business opportunities for lenders. On the other hand, SMEs should be able to take advantage of technology, not only for rethinking their business model, but also for selecting the best partner for their specific credit needs.

Open banking

Open banking services will dramatically improve the quality of lending. Sharing of valuable information about the customer will strongly impact not only credit scoring but also change the customer-lender relationship. A new way of delivering traditional bank services will affect not only credit providers but SMEs themselves. New API based services will empower seamless cross-border transactions, thus facilitating the internationalization of SMEs. By eliminating troublesome transactions with multiple national rules and currencies, the traditional business models of SMEs will be empowered to target international markets. Traditional supply chains will evolve significantly, not only opening new market opportunities, but also offering space to foreign competitors.

Looking at the pace of these evolutions highlights the different speeds of various initiatives. The EU is considered to be operating in a traditional banking era, not only due to its regulatory regime, but also its aged population. Online alternative finance for businesses takes only 1.42% of the lending market in Europe (excluding UK). Asiatic, UK and US markets develop more dynamically.

Competitors, increased customer expectations and even Regulators have pushed traditional credit providers to innovate. And now, opportunities driven by new technologies and open banking services have started to emerge creating a pulling effect.

Innovation of financial services and the pace to fully digital services are accelerating. As a domino effect, even the traditional institutions such as wholesale Banks have to struggle to compete, launching ambitious digital innovation projects and filling the gap with Fintech and BigTech rivals. Despite the draining legacy of the physical branch network, cost of delivery will have to be minimized. A digital relationship becomes a must, whilst physical presence will be a luxury.

Finally, dreaming of a fully mature digital lending market in 2030 can be for some too ambitious while for others it’s a certainty. For sure, the new lending marketplace will include a variety of credit providers besides the Banks as they are known today. Some may be independent while others interconnected to complex networks for better management of risks and portfolios. The combination of players, technology and changing needs of SMEs will be transformational, resulting in more creative and dynamic lending offers.

Banks will still have the central role in that arena, but only if they are able to involve SMEs in the virtuous circle of digital innovation, being more FinTech oriented that the FinTechs themselves.