Policymakers are keen to stimulate more bank financing for small and medium enterprises, but technology is enabling non-banks to fill the gap more effectively.

Small business is big business – everyone agrees on that. Small and medium enterprises (SMEs) form the backbone of most economies. But while banks have always talked of the importance of this segment, providing comprehensive funding has proved elusive.

The topic of SME finance is very much at the forefront of policymakers’ thoughts in both developed and emerging markets. Saudi Arabia’s central bank governor talks to The Banker about efforts to improve credit information to make small businesses more bankable. And SMEs also form a central focus of the EU’s capital markets union initiative, which is looking to promote securitisations of bank loans to SMEs. This underscores the assumption that bank distribution networks will remain at the heart of SME financing.

There are growing signs, however, that these initiatives are being outpaced by events. Even without heavy public-sector stimuli, the SME funding gap may yet be filled – but not by the banks.

Emerging markets may lead the way, because they often have the largest share of SME activity and the greatest levels of underbanking. Legal systems can be unsuited to commerce, corporate accounting standards are unreliable and large state sectors crowd out entrepreneurs. Alternative providers are waking up to the fact that this challenge is their opportunity.

Our April cover story shows how Chinese online merchant and technology platforms such as Alibaba and Tencent are starting to bank SMEs using intimate knowledge of customers’ cash flows gleaned from their existing relationship. Because these platforms are vital to the SMEs’ own operations, they also have a source of leverage to ensure loan repayment.

The internet is global, so the trend is catching on quickly in developed markets also. One of this month’s interviewees suggests that so-called crowd-funding by online platforms in the US and Europe will soon drop the ‘crowd’ prefix to become part of the mainstream funding mix for SMEs. Banks are having to think about how to partner these new entrants or risk being squeezed out.

Even Europe’s co-operative banks, previously the archetypal local relationship lenders to SMEs, are finding their business model disrupted by technology. And on our website this month, you can hear former banker Jean-Pierre Mustier talking about his new role at an investment fund looking to provide debt and equity to European SMEs left behind by the banks. It is a tough time to be a banker, but perhaps the good times for small entrepreneurs are just around the corner – at last.

 

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