What alternatives to banks do small businesses have?

7 May 2020

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Most companies were not prepared to deal with this situation. Small businesses in particular are now struggling to refinance as normal despite the government pressure on banks.

In the past month, as we anticipated, the government announced we are entering a recession, and is even counting on a downturn in growth of some 9%. This situation changes daily and might deteriorate or improve depending on developments in the health crisis. However, most companies are not prepared to deal with a situation like this.

Due to the sudden shutdown of the economy, some companies’ revenues could collapse by between 75% and 90% depending on the business sector. The big difference between this major health crisis and previous crises is that it is widespread. No economic sector is being spared by COVID-19 and its consequences. Around 60% to 70% of companies are estimated to be affected in a recession. The current crisis is affecting nearly 100% of businesses, particularly in countries where lockdown measures have been put in place, such as France.

Under government pressure, the banks have also announced a six-month moratorium on corporate loan repayments. As in the 2007-08 crisis, the central banks of the G7 countries took rapid, coordinated action, starting from the beginning of March.

The challenge in the coming weeks is to prevent the public health crisis, which is now an economic crisis, from creating a financial crisis. The main aim of the various central bank interventions is to contain the tensions observed in the financial markets, especially in the credit market.

As market participants are expecting an economic recession, they are panicking, withdrawing from the market, and no longer want to lend; as a result, the companies considered to be the weakest are struggling to refinance. There are major tensions in the US credit market, for instance, where companies with profitability issues (including companies in the shale oil sector) find it very difficult to refinance even when conditions are normal.

Will transparency prevail?

In February, French Finance Minister Bruno Le Maire reviewed French banks’ records in terms of their commitments to moderate bank account charges for the most vulnerable customers. Mr Le Maire also decided to use transparency as a sanction for unscrupulous institutions. However, as of today no equivalent measure has been taken to regulate banks’ treatment of business customers.

When it comes to international transactions, banks have made no significant commitment to the most vulnerable economic players, such as small businesses.

A recent survey of more than 10,000 European companies found that small businesses faced discriminatory fees in the currency exchange market. It showed that by being loyal to their banks, small businesses pay up to 14 times the fees paid by larger companies. In the euro-dollar pair alone, this overcharging generates on average 638 million euros in revenues per year. And small businesses certainly lose out in the process.

This survey echoes the 2017 UNAF survey of 60 million consumers which led banks to take steps to help their vulnerable retail customers. It showed that bank account charges sometimes account for one third of the big retail banks’ revenues. While banking terms are changing in favour of individual customers, it is not yet game over for business customers.

For SMEs, there is an alternative: fintechs. Two European directives, PSD1 followed by PSD2, put an end to banks’ monopolies and enabled the creation of payment institutions. These players have democratised currency payments and exchange hedging solutions with their online services and transparent prices. Small businesses can therefore get access to real-time exchange rates, previously only available to large companies with access to trading floors. For small importers and exporters (accounting for 38% of French exporters in 2017 and 17% of total exports according to INSEE, France’s national statistics institute), the impact is significant.

Stéphane Mallard, in his essay Disruption, criticised the opacity of conventional offerings“Either the products are too numerous or the offering is totally incomprehensible (deliberately or otherwise)”. The new entrants, meanwhile, are offering clear solutions and have even designed tools, such as fee comparison engines, enabling small businesses to reassess their relationships with conventional banks and become more independent.

In France, where small and very small businesses account for 99.9% of the national economic fabric, the competitiveness of small businesses is a crucial factor in the country’s growth. Yet these companies are often unaware that they might have access to innovative solutions. In the words of Geoffroy Roux de Bézieux, “increasing the contacts between fintechs and small business is a good subject for economic policymaking.”

Article by Pierre-Antoine Dusoulier, CEO and founder of iBanFirst, originally published in Entreprendre