Can Electronic Payments Save Struggling SMEs?
When it comes to solving the world's economic issues, it seems there's little on which members of every nation can agree.
But one common view you're likely to hear, whether you're talking about developed or developing economies, is that small and medium-sized enterprises (SMEs) are key drivers of economic growth. And these drivers that aren't receiving the support they need to succeed.
Past research supports the importance of SMEs, as studies have found they are a key supporter of innovation. For example, SMEs in the United States file 16 times the number of patents as do big businesses. In Germany, more than 50 percent of SMEs launched an innovation between 2008 and 2011. Even with this output, SMEs still aren't impacting their respective countries' domestic consumption, spending and employment markets like some economists say they should.
A new white paper from MasterCard Advisors, entitled "Reinvigorating Global Economic Growth,” outlines the challenges facing SMEs and presents solutions the financial world can use to address their most prominent issues. The report named the lack of access to low-cost financing and inefficiency in the financial supply chain as the biggest obstacles to SMEs.
But what solutions will help SMEs become better served by global banks? How can financial institutions create more access to interest rates that sustain growth? And, more importantly, how can these solutions combine to spur new job creation?
In this PYMNTS.com Data Point, we'll take a look at MasterCard Advisors' assessment of this issue, and examine the two biggest threats to global SMEs and their respective solutions.
The Problem: SMEs Lack Access To Low-Cost Financing
The first obstacle holding back SMEs is their relative inability to access affordable financing, which MasterCard named "the core problem SMEs face globally." Researchers say SMEs are finding this to be their second most pressing problem. Since 2009, access to finance has lagged only behind finding customers in polls as the most pressing problem SMEs face.
MasterCard Advisors suggests the reason this difficulty persists is that banks aren't functioning in a way that allows them to provide low-cost financing to SMEs. The white paper cited the fact that SMEs only account for 20 to 25 percent of bank loans in China. Even China-based SMEs that do gain access to capital though banks pay twice as much to borrow as larger corporations.
Since SMEs generally lack substantial capital, an earnings track record and state guarantees, larger banks are generally unwilling to lend. This forces SMEs to select more costly finance options, sometimes from less secure providers.
The Solution: Germany Provides A Sound SME Lending Model
The white paper studied global banking and technology cases to determine what countries should be doing to address this SME obstacle. It found that SMEs may benefit from using small/local banks more often to meet their lending needs. MasterCard says that small to mid-size banks account for 54 percent of SME lending in the United States, while in China, these banks issue twice as many loans to SMEs than larger banks.
To bolster this point, MasterCard cited statistics from Germany. Small German banks, the report says, provide half of all external financing to SMEs in Germany. Because of this, the report reasons, it outperformed most other developed nations at producing small but highly successful companies. America, by comparison, still relies heavily on large financial institutions for SME lending, and was a distant second to Germany in this category.
The Problem: SME Financial Supply Chains Are Inefficient
The white paper found that many small businesses are unable to benefit from traditional electronic payments due to their scale and cost structure. This leads SMEs to obtain higher working capital because of a lower velocity of capital through the supply chain, and to pay higher operating costs for these supply chains.
"Unfortunately for SMEs, their scale and cost structure make traditional and broadly available electronic payment methods like ACH and credit transfer less feasible, leading not only to higher costs but also to slower procure-to-pay processes than large enterprises," the report authors wrote.
Further, the problems are magnified in cross-border payments due to a lack of alignment with global open payments standards. Last week, MasterCard and Western Union announced a new partnership designed specifically to help solve this problem.
The Solution: SMEs Need To Adopt Electronic Payment Innovations
According to the white paper, SMEs that have access to new electronic payment innovations are able to improve their efficiency and margins. So, to bolster their supply chain, MasterCard suggests that SMEs move away from traditional electronic payments such as ACH and credit transfer.
It cited a recent study that found SMEs that had embraced commercial card acceptance had order-to-cash cycles that were 10 times faster than checks, ACH and wire transfer. SMEs that embraced new electronic payments saw "significant improvements in working capital requirements for suppliers."
New electronic transfer options may spur better lending, the white paper noted, as better data may allows SMEs to leverage more information to support their borrowing bids.
For more informative facts and figures, read the full white paper here.