The Power of Data Podcast
Episode 89: Unlocking SME Growth
Guest: Dame Teresa Graham, UK Chair, UK Finance for SME’s and Ravi Sidhu, Subject Matter Expert, Credit Risk and Compliance for SME’s, Dun & Bradstreet
Interviewer: Sara de la Torre, Head of Financial Services, Dun & Bradstreet UK
Sara de la Torre 00:00
Welcome to the podcast from Dun and Bradstreet. My name is Sara De La Torre, I'm the Head of Financial Services at Dun and Bradstreet in the UK. And I am delighted to speak today with my colleagues about unlocking the SME growth in the UK, perspectives, challenges and opportunities in an interconnected market. Welcome Dame Teresa, and Ravi, to our podcast. Please allow me to introduce you to Dam Teresa Graham. The UK chair at UK finance for SMEs. She's also passionate about breaking the red tape in the SME market, sees an active advocate on the subject and advises the government on specific regulatory compliance matters. And she's also part of the administrative burdens advisory for HMRC. Welcome
Dame Teresa Graham 00:57
thank you.
Sara de la Torre 00:58
And welcome Ravi, Ravi Sidhu, subject matter expert for credit risk and compliance for SMEs at Dun and Bradstreet, welcome.
Ravi Sidhu 01:06
Thank you.
Sara de la Torre 01:07
If we go back to standard economics, raising SME, productivity must be one of the core objectives for the UK economy. And by doing so, what we achieve is a much fairer economic environment, where we have reduced taxes and better public services. Therefore, we probably need to think about that. The challenge that we see in the market is that SMEs feel that they lack resources, capabilities, and ability to keep up in a rapidly changing market. Dame Teresa, what's the situation right now?
Dame Teresa Graham 01:51
Well, can I just first of all say how much it matters to be here within the financial services world? Because there are only two organizations that have intimate knowledge of SMEs. One is HMRC, and as you can imagine, SMEs don't find them particularly friendly, and the financial services world. So you can make a real positive, significant difference to the lives of SMEs. And I'd like to put that into perspective, what is the life of an SME? What is it like out there? Well, everyday ranges from excitement, to extreme misery. And it's equally scary and exciting out there. It's exciting because you can make a real difference to yourself, to the economy, to your community. But it's very scary, because the risks are intense. So you get up every morning, you want the phone to ring, you want big orders through, you're obsessed with cash flow, you're there all the time, will I get paid on time. And it's not just big businesses that don't pay on time. It is small businesses to small business. You're trying to return to pre pandemic and pre Brexit levels. And if government says Brexit is over and it's all fine and dandy, that is absolutely not the case. And I posed this concern to someone from the Department for International Trade some time ago, and he said, well, if you can't trade in Europe, go and trade in Asia, as if you could just turn on this tap, especially if you're an SME. Which leads to all the rules and regulations that SMEs and other businesses have to comply with. And it's impossible to comply with them all. I did a study for government some time ago, and said it is the cumulative burden, is the burden of all these things, it's not one thing that you can do, that will reduce the burden on businesses, it's the cumulative burden. And therefore, SMEs comply with regulation, based on the risk of getting caught. That's what they do. And that's what they have to do. They're worrying now, because they've got the Bibbles loan to pay. And these were loans that were taken out often by permanent non borrowers. There's a lot of businesses out there that don't usually borrow. So it's quite scary having a loan, who can they talk to at the bank? Is there a person? What are their options? And what are all these referral platforms that people keep talking about? And what digital skills do I have in house? How can I become more efficient, more productive, more effective? Can I afford to do that? I've got rising costs, is there something I can do in the digital world that would avoid that? And how can I attract good people into my business? And actually, how can I attract anybody into my business? Because the war for talent out there is intense. And people just want to write their own tickets now, it doesn't matter what kind of business I'm in. People want to work for me on their terms, and that's really hard. And wage inflation is really hard. Can I get apprenticeships? Are there grants available? And customers now want to make sure I run an environmentally friendly company. Do you want me? Is there more I can do? Where do I find out that information? And there seems to be hundreds of ways of measuring this carbon impact. And even banks that have carbon calculators, on their websites, why are they different? How can they be different? I don't know. So, snapshot, that's what it's like for SMEs out there. It is scary. But the SMEs are resilient, they are creative, they are determined, they are enterprising, and they will come through and emerge and thrive.
Sara de la Torre 05:34
And there are 95% of the UK…
Dame Teresa Graham 05:37
There's 5 million of them out there, varying shapes and sizes, Yes
Sara de la Torre 05:42
absolutely. So it's not a great outlook in a heavily complex market. But equally, it's a substantial opportunity, if we learn how to embrace it, and it needs to be embraced differently. And fundamentally, what I see is that as we enter in a digital market, a new set of challenges that are unprecedented, and that we've not seen before, arise. In an equal way to the challenges that the bigger corporations have faced and are facing, and therefore, perhaps we need to include them on these transformation process, but also understand their nature.
Dame Teresa Graham 06:27
Yeah.
Sara de la Torre 06:27
How do you see the market Ravi?
Ravi Sidhu 06:28
Well, I mean, we can't have a conversation about what's going on in the market without actually taking into consideration the broader picture. So there's, there's a huge number of geopolitical risks. There's inflation. And in terms of the impact, well, the hard numbers are year on year 16% rise in, you know, insolvencies, and that's across, you know, a Europe, we're not alone in that. And I would also say, in terms of the insolvencies, it's not just, you know, across the board, there's certain industries that are hit harder than others. So construction, wholesale, retail, food, and accommodation. And so, you know, all of these areas, they're acutely impacted as a result of the higher costs and inflation. So it's gonna be harder for SMEs. And they're going to have to think differently about how they adapt to this environment. I think, you know, at the same time, as all of this kind of negative news is spiraling around, I think we're coming up to the point where maybe interest rates hopefully have peaked, maybe that will make a big difference to, you know, lending and supporting from a lending perspective in terms of costs. So I think that's something that SMEs can look forward to hopefully, that we could be turning. But at the same time, but you know, the other thing I would actually say is, it's at times like this, where innovation really comes to the fore, it's when you're forced, you know, you've got your back against the wall, and you really have to think it's not a comfortable place to be. But it's often where things can really change. It can be an inflection point
Sara de la Torre 07:53
I agree. And the most disruptive examples that you see in the history of economics and society always happen at the time of radical change. We are right at the beginning of that significant transformation.
Dame Teresa Graham 08:08
Yeah. And also, what is interesting, there's a big opportunity here in the run up to an election. I mean, okay, the election might not be until the end of next year. But SMEs are particularly sexy in the run up to an election. So those who support SMEs can influence government a lot more in the UK, there's a lot of votes in this, 5 million businesses, a lot of votes there. So we need to take the opportunities that are presented to us in the run up to an election and in the first bit of the new administration, which is the time they get a bit more radical, we will need to make sure what is it we're asking for and ask for it now.
Sara de la Torre 08:46
I agree. It's a unique opportunity for the UK, in particular, to revitalize the role that the UK plays in the economy, not just at national level, but also in the international foreplay.
Dame Teresa Graham 08:58
Yeah
Sara de la Torre 08:58
I also think is very important. And we think about not just lending. It's more than that. UK, SMEs and UK finance and European and global finance, for that matter in SMEs is interdependent, and there are other factors that I think matter. But if we go back to the traditional way in which SME finance has been adopted, traditionally, it's been a very complex lending process. It's been very manual. It's been very expensive for the financial institution.
Ravi Sidhu 09:33
So you're right, you know, the SME space is a highly underserved market, there are several things that can happen within that space. So I think we always talk about data and how it can actually help in these scenarios. And I think one of the key things with those costs we're talking about, you got operational costs. And it's important to break this down operational costs in terms of how do you process the application, what's the cost to the business, but then there's the pain further down the line in terms of credit losses, so have you made the right decision. And then there's also fraud risks and the impacts of that. Now, data, if you have the right data, and you have the right datasets, but also the capability to actually leverage the information through AI or other technologies, that's where you can really enhance that decision making process to make sure you are making the right decisions and making them quickly. And you get the benefits in terms of those costs across those three areas.
Sara de la Torre 10:24
Absolutely. What do you think?
Dame Teresa Graham 10:26
Well, I mean, I love SMEs, but there's a lot that's wrong in a lot of SMEs. And I sit around roundtables with the British business bank and the banking world. And we looked at this very recently, and we thought, what else needs to be done, and there were a few things. So it is a fact that a lot of SMEs lack fundamental skills of running a business, especially planning, forecasting, cash flow, all of that, all that management stuff. And I see a lot of business plans. And too often do I see the only link between the numbers, and the narrative is a staple. That's all, there's nothing else there. There's a lot of advice out there, there's too much, we need to be able to signpost the SME to where they will learn better the fundamentals of running a business, where they will learn how to draw a compelling business plan, a great pitch and good narrative. The other thing is SMEs have a very limited awareness of the financial products out there. Beyond overdrafts and loans, there's little thought given. I love confidential invoice discounting, I love it for growing businesses. And I spent hours persuading SMEs, that it doesn't mean you're giving up control, it doesn't mean that people will think you're going bust. So again, I think we need to effectively educate the small businesses to enhance their understanding of what there is available for them at any given point in their journey. Because too often, if they can't get access to what I would call traditional funding, they just give up. So there's a need to get a better signposting so that we match the SMEs better to the funder that suits them at a particular point in time, so we align them better. And also, I'm finding that SMEs rely much more on social media platforms than they did the old traditional website. So we need to understand how to give them, how to message them, how best to, when to, how to, all of that needs to go, we need to give that some thought.
Sara de la Torre 12:37
And let me pause you there. Because I think that brings us back to the point that Ravi was already highlighting in our previous conversation, which is around the role that data plays in all of these exercises
Dame Teresa Graham 12:47
Definitely
Sara de la Torre 12:47
The understanding of which, SMEs, we're talking about understanding that the needs of a small SME operating in a particular market are different to the ones of another. And therefore, the way we tailor services to them need to understand the nature of those businesses and their requirements. And it is a role in my view and a responsibility that the entire financial apparatus must understand. We're nurturing new ways of embracing SME resilience.
Dame Teresa Graham 13:23
Yeah.
Sara de la Torre 13:23
So to me, it is very important to understand the size of the organization, it is very important to understand how to access that information. And it occurs to me that sometimes a large amount of SMEs may rely too much purely on overdraft, because that's the only thing they know.
Dame Teresa Graham 13:43
Yes.
Sara de la Torre 13:44
And unfortunately, that's leading on to the challenges that we see now around cash flows. And perhaps it's worth taking some reflection of that and think about ways in which we could address some of that with new ways such as, they call it lending as a service, or, more traditionally, thinking differently about the way we finance invoices, the way we finance working capital, are there new trends, do you see that the industry is starting to understand?
Ravi Sidhu 14:18
So in terms of you know, different ways of lending and lending as a service, I mean, first of all, what Dame Theresa was referring to earlier in terms of the options around lending, I've seen numbers from UK finance, for example, where the highest kind of borrowing is within the kind of the overdraft facility, which is almost like you passively fall into that trap of, you're paying those fees. And that's very expensive as well. So, you know, clearly there are things that SMEs can do better. And there are options out there in terms of alternative kind of forms of credit. And sometimes it's not really credit, because we alluded to this in terms of working capital. invoice finance, you know, that's really helping you support your business, you know, the view of it, and the way that maybe SMEs perceive that probably needs to change. But also, that explanation may be from whether it's banks or other financial institutions or elsewhere, how does that get to the SME? How can they be educated a little bit more about where that kind of fits together? Because that's what it's really about. matching their need, with the right tool to help them.
Dame Teresa Graham 15:20
And have you noticed also Ravi, how asset based lending is soaring, something's happening there. So we need, you know, we just need to educate, we need to get this in front of them and say, This is why this will work for unit.
Ravi Sidhu 15:33
And I think a lot of the things even within asset finance is driven by the realisation that, you know, there was this belief that low ticket high volume, that's where you automate. But the reality is, you can do it everywhere, it's just you have to do it in a slightly different way. And so asset finances is experiencing that the moment, we can see that.
Sara de la Torre 15:52
yes, and it's important that we think about the fact that during the COVID time, a new trend emerged, which is the fact that a growing amount of SMEs is made out of one or two people who are now launching their own business. And therefore, the need to think differently, is also deriving from the fact that their requirements that we need in the economy must change with different ways of tapping into that market that are far more innovative, and more targeted at making their lives easier, making a difference, perhaps in a way that is similar to what we've seen over the past years in the consumer market. And I'd like to make an observation there to see if you see a parallelism there, and an opportunity to learn some lessons from that market, because we've seen that in the case of consumer market, there are loads of new alternatives, and loads of new ways to access consumer loans, consumer finance, technology platforms, fintechs, traditional and Neo banks, they're all endorsing very creative ways to drive consumer finance, maybe it's time to think about some of that in the SME finance market.
Dame Teresa Graham 17:12
That's a very interesting point you make. So the challenger banks are coming to the fore there. And there's a couple of things there. Because the thing that I am finding is, although the challenger banks are gaining traction, they're not able to supply all the products that an SME needs. And I'm wondering whether we will see a shift towards SMEs having two banks, you know, having to go to two banks, one because of the reason you've just said, because they find it's faster, quicker, cheaper, whatever, in the digital world of the challengers, or the fintechs. But also the more traditional because they're the ones with the money to produce all of the products that they need from time to time. I don't know, what do you think of that?
Ravi Sidhu 17:54
Well, I mean, you know, in the consumer space, I would think nothing of going to a best buy table. And just saying that's the product I want, I want the one that's going to be the most, you know, whether it's the term of the interest free period, whatever it may be, that kind of draws me to that. And there's nothing to say that SMEs can't or won't do the same. And I think to some extent is happening today, you have marketplaces where they can actually go to, now whether everybody's doing that is a is a separate question. But in an ideal world, absolutely. Why shouldn't you look for, you know, the most competitive product, but the question is, how easy is it? And how much do they understand of those products? And is there a is there a comfort factor that keeps them within the domain of what they understand or what they feel comfortable with? And they don't want to push outside of that. So there's lots of challenges in terms of how SMEs view this.
Dame Teresa Graham 18:43
Yeah, the other challenge, I think, is trust, trust in financial services world, which, you know, which is not a given. And you've been through a, you know, a bit of a trough and I think things are improving. But there's a big problem there or there's a big there's a big something that you have to do to gain trust because with 51% of permanent non borrowers, which is the largest since the pandemic, then we need, you need to do something to get closer. to get these businesses to trust you more.
Sara de la Torre 19:14
And this is where we tap on to the notion that it's not just about lending. It's also about providing additional value in the shape of tax services, advisory, invoice processing, debt management, all sorts of alternatives that can really highlight and reinforce the role that the wider apparatus has and the commitment that we're making to drive the sustainability of those firms.
Dame Teresa Graham 19:43
Yeah.
Sara de la Torre 19:43
And now that we talk about sustainability, another plus element, to me, it's linked around sustainability. You touched on that briefly before. And I'm keen to go back to that, because, of course, the broader economy now he's talking about ESG, and sustainability. And ultimately, we see how the financial system has been built for a long time around profit. And it's not been a long term. But as we enter a new market and a new economy, where consumers are demanding something different, we see that the role of sustainability is driving and more long term focus, which must encompass SMEs. Now, SMEs are ready to embrace sustainability, the challenge that they have is resources and knowledge, again. So I pose that question to yourselves here and is, are we really sure that the role of sustainability depends solely on the SME? And is there something that financial institutions can do, and need to do, in order to impact on the overall net zero goals, which include, of course, SMEs?
Dame Teresa Graham 20:59
I do think a lot of work is going in from many of the individual banks into trying to, for their own reasons, because they need to measure the carbon impact too, so for various reasons, you know, we are aligned here. I think, what I don't see, however, I don't see as much collaboration as I would like to see. I know there are cartel rules, and I know you abide by them and so you should, but I do not understand in terms of net zero, how the financial services world can't be aligned on a number of things like carbon calculators, I mean, how can there be 100 ways of calculating carbon, so at least we'd have a level, the SME would then have a level playing field, just how to calculate right? Now I'll choose my lender. So I don't think there's only competition issues there. I just think, we just need, you need to be a bit more collaborative. And I think it's a role of businesses as well, to play their part, you fund big businesses, you've got great influence. I mean, big businesses can help their smaller brethren, in many, many ways. And again, it's in their best interest to help the supply chain that they're involved in, to help them get better to help them towards Net Zero, to help them understand EBIT, to help them understand cash flow.
Sara de la Torre 22:20
Yes. Do you see also responsible lending part of these conversations? So driving models that enable lending based and sustainability goals? And do you see examples that are already happening?
Ravi Sidhu 22:37
I think there are examples already today in terms of kind of lending for good for climate change with the infrastructure to support that the net zero aims. So I think, you know, within the framework, the risk framework with any bank, there will be these additional overlays now. So in the past, it's been about credit risk, but now it's about sustainability, about all the other risks that haven't been taken into consideration. So in some ways, the banks are sitting on a lot of information there, in terms of what they perceive as a good risk, and that I'm talking about in the broadest sense, and what they see as a kind of more of a negative risk. And that information is useful for them to make that assessment. But actually, when we're talking about partnership, and working with prospective SMEs, that information is useful to that SME.
Dame Teresa Graham 23:18
yeah.
Ravi Sidhu 23:19
How do you perceive me today? And so in some ways, it becomes of, well, I can choose the best business, I can go out and say, Well, if you're doing these kinds of initiatives, I'll finance you but equally, you've got a book of business, why not work with those businesses and actually say, Well, how can we help move the needle there? How can we improve? And how can we collaborate with you? So that's just another way of looking at it. You know, whether it's, you know, with other businesses, large to small, whether it's financial institutions with SMEs, there's multiple partnerships that you can think of.
Sara de la Torre 23:49
Yes, and I think that collaboration and shared services and sharing data is more and more a recurring theme as we evolve in our conversation. I think that some economies certainly are taking the lead in some of these initiatives. And we see that in some places, so I believe in Singapore for example, this is this is quite advanced, there are smart KPIs powered by data and machine learning and advanced analytics that allow you to establish KPIs and sustainability criteria that lead to incentives on your lending process. I think that this is something that needs to be available for SME finance overall. And I think that equally there is a need to think creatively about the whole thing. And to me, again, this is about collaboration, collaboration between the large and the small one between the financial institution and the SME between certain types of financial institutions and others, because not everybody has the answer to everything. And there is also, of course, a wider collaboration amongst public and private sector and services providers and data providers to enable that change, which to me, is interconnected. And I think that's, that's, to me, the biggest change that we see in the industry, which perhaps wasn't so strong before. But today, if we want to make a change, we've got to see that collaboration thriving at the core of the transformation.
Dame Teresa Graham 25:21
And I think, on the ESG agenda, I can see the E and I see the G. But I don't very often see the dialogue, or the narrative around the S. And I think there is an awful lot we need to do to understand what that means and how the financial services world can react to the S in ESG
Sara de la Torre 25:44
yes, the social aspect is more complex. I mean, it has so many dimensions. But we have to start somewhere
Dame Teresa Graham 25:52
We have to, we have to start that. And maybe that's a way of collaborating, because if you can't collaborate on social aspects, there's no real hope, is there.
Sara de la Torre 25:59
I think I think there's been a lot of incentives on the E which have driven the behavior in that direction. But if we want to achieve the overall sustainability goals that United Nations is asking us to fulfill.
Dame Teresa Graham 26:14
Yeah
Sara de la Torre 26:15
we really need to start looking at what technology and data can do to start addressing the S. And we also need to think about perhaps a different type of governance.
Dame Teresa Graham 26:26
Yes.
Sara de la Torre 26:26
Which I think that in the case of SMEs could also be different. And I don't know what you think here, but but I think that there is a lot that needs to be done. And of course, this is the beginning. And I think part of these conversations is to really reflect and think creatively. So what do you think, if you could do something. What do you think is missing? And what could we do tomorrow if we could start?
Dame Teresa Graham 26:49
Well, you know, I was thinking of some calls to action, because, you know, I never let an opportunity go by. And for example, I was talking to the small business commissioner at one of the conferences. And we all believe that businesses, big businesses should have a director on their board responsible for engagement of SMEs. And both of us have seen in the past, where this happens, there is a positive benefit to the SMEs in their supply chain. And we've seen that on prompt payment, in particular where they ring fenced the SMEs in a way, which has been outstanding. So that's one thing I would do. The other thing I would do, as you know, I advise HMRC, and one of the things I say is, if you're at the sharp end of delivering services to SMEs, because you call us customers rather than taxpayers, then you need to spend a day with an SME watching, listening, seeing what goes on in that. And we find SMEs to host. So I would ask all of whoever is listening to these podcasts, if you're at the sharp end of SME lending, have you spent a day with an SME? Do you know what it's like? So just go and visit and do that. I also think businesses learn best from businesses. And I think you could as the financial services world, convene SMEs into learning sets, you put them in a room and you leave them talking, they've all got the same problems. They've all got the same opportunities. I did one of those a few years ago with 10 businesses. And we could talk about what the issues of the day were, they got to know each other's businesses and there was a trade delegation, one of them was invited to, they went abroad representing the other nine. So there fantastic things emerge with a bit of creativity. I also think if you could help, so I'm asking for your help here, I'm constantly saying to government, when you procure with big businesses, please can you have on that agenda a demonstration of how that big business treats its SME community in its supply chain? Does it have one? What does it do? Is it helping them? Because that to me is one way, especially on net zero, actually all of these things a big businesses could pass on. And finally, actually, if you talk to the scale up Institute, there are less about just under 30,000 businesses within the SME community who provide 55% of the GDP of the total population. So how about juste 30,000 do that? How about the financial services industry focusing on 100? You've got the data, you know better than anybody, when businesses is going well, and when it's not, because you see the money every single minute of the day. So how about let's get, if there's 30,000, out there, let's target another 30,000. Can you imagine, with that GDP, can you imagine how much GDP, extra GDP could be unleashed? Why don't we do that.
Sara de la Torre 29:58
all extraordinary suggestions and takeaways, Dame Teresa and I agree with them all. I also think that the UK is an economy and as a country has always pioneered transformation and innovation. And I think that maybe would be a great opportunity for the UK to start embracing SME finance in a transformative way, with some of the examples that you suggests and others, in order to reposition that role, which I think is fantastic. And I think that we need to look back at our history, and the things we've achieved and the transformation that we've done with fintechs, investments, transformation. And it is remarkable. So it is important as well not to lose sight of that. And perhaps there is a need to pivot the engine of creativity and international apparatus that we have to the advantage of the SME market. What do you think?
Ravi Sidhu 30:53
So I think your final point you were talking about information and data, and actually one of the big areas where I think we can really make a big influence is within that kind of sharing of information. So, you know, the last five, six years, we've had the commercial credit data sharing, and I've talked, you know, I've been an advocate, and it's been something that I know that banks, financial institutions, will benefit from. But let's just focus on the SME perspective of those data sources. Today, there is a fragmented view of that information. And so, from an SME perspective, they wouldn't necessarily know when they apply for credit, are they taking into account that loan from bank A, or, you know, the overdraft facility that I've been managing really well from Bank B, it's just not known to me, it's not clear. And the reality is, the reason why it's not clear is because there are four commercial credit reference agencies, and they all may have a slightly different view, all because banks aren't sharing across all of them, they're potentially only sharing across one, it's only mandated for nine designated banks to share across all. And as Dame Theresa mentioned earlier, the market share of those challengers is much larger, but there's nothing to say that they should share across that. So I think, you know, democratizing that data will really help SMEs and it'll give them a view and you know, tied to that is their understanding of their credit as well. I can pull a credit report, and I can actually have a look at that. It's one of the services obviously that D&B can provide in that regard. And it's something that's really powerful for an SME to really start getting close to, you know, how am I managing my finances, it's all in one place, you can physically see that. So I think that's one of those really kind of important areas that could really benefit.
Dame Teresa Graham 32:28
I’m with you on that.
Sara de la Torre 32:30
Breaking Barriers.
Dame Teresa Graham 32:32
Absolutely
Sara de la Torre 32:33
Democratizing data.
Dame Teresa Graham 32:35
Defintively
Sara de la Torre 32:35
making it available for everyone no matter the size, and thriving collaboration amongst the small and larger players. Big and small institutions, public, private sectors, all together, driving change in SME finance
Ravi Sidhu 32:51
Absolutely.
Sara de la Torre 32:52
Thank you
