SMEs: not fit to serve in the Instant Economy?
We’re in the fourth age of money, the next leap in the evolution of commerce, where all aspects of the existing economy are moving into the digital sphere.
This is the Instant Economy, where businesses can instantly access and consume services to bring innovative and game changing products to market at the pace dictated by end-user demand.
But it is fast leaving SMEs behind in one area: payments.
Below the surface, and giving rise to such convenient services, is a controllable technological infrastructure, removed from the legacy constraints of physical mainframe IT.
It is a flexible and efficient infrastructure, where cloud technology makes services scalable with near-unlimited processing power. API calls initiate a synaptic pulse of automation with instant and real-time consequences to deliver great value to end-users, leading to market ubiquity with only a handful of years in operation.
But what of the vast majority of SMEs – the ones accounting for 60 per cent (16.3m) of all private sector employment and 51 per cent (£1.9trn)of annual private sector turnover – are they equipped to serve the Instant Economy?
Payment ‘tech debt’
The industries and businesses who are only now shaking off legacy technology are fast being left behind as digital-first startups overtake and replace them with new technology.
None more so than the 25,000 accountancy practices providing mission critical bookkeeping for some two million of the UK’s SMEs, according to an EY report,managing salary and supplier payments and keeping cashflow healthy.
While automation has brought cost savings and efficiency to the front office, the same cannot be said for back office payment operations; partly for the sheer size and complexity of the wider antiquated payments infrastructure. The so-called ‘tech debt’ presents a monumental task to bring the UK’s payment infrastructure into the Instant Economy, let alone pass on the benefits to SMEs.
Since the financial crisis, SMEs and their payment needs have only moved as fast as the regional accountants who serve them, or the commercial banks who see SMEs as oversized retail customers or small-scale corporates.
This has resulted in a fragmented approach to SME payment services, and one we experienced ourselves during the set-up of our first business. Of particular frustration was the labour effort required to manage incoming payments and reconciliation, and the inability to automate the supplier payment process.
The new technology of the Instant Economy is bringing the inefficiencies and manual nature of bookkeeping into serious question.
Why is there such a disconnect between accounting software and business banking, forcing accountants to transfer files and duplicate data sources? Why do accountants need to spend hours manually reconciling and making payments to SME employees and suppliers? It is little surprise to learn that a recent survey by Allstar Business Solutions found over half of business owners struggled to sleep due to worries about cashflow.
But new challengers are encouraging SMEs to imagine a world where seamless payments aren’t the luxury of large corporates. Instead, they ask them to imagine payments that just happen behind the scenes, quietly and effectively.
Bringing SMEs in line
The inefficiency of the current payments infrastructure is too slow, difficult to track and overly reliant on manual processing. This limits transactions, limits business and limits economic growth.
It has become unacceptable for SMEs, who are themselves facing a tipping point as their customers expect greater convenience, as their fellow businesses demand real-time decisions and confirmations, and as the regulator creates more change and complexity.
But the world of payments is changing rapidly, bringing with it new ways of moving money and fundamentally transforming the way commerce operates. Following the challenges to divest the branch-based SME arm of RBS, Williams & Glyn, the Alternative Remedies Package was agreed in 2017 with the overarching aim of encouraging innovation and competition within SME banking.
In August 2019, Modulr was one of four companies awarded £10m from the Alternative Remedies Package from a pool of 76 applicants to drive our firm conviction that SMEs deserve simple, secure and reliable payment capability.
We’ll be partnering with accountancy practices and software providers, including Sage, to roll out improved payment functionality. It is not a case of replacing traditional service providers but working with them to build a robust and profitable ecosystem for all.
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- Insight: Head of products, BBVA Open Platform, on the future of payments, CX and Banking as a Service.