Debate around the lack of financial services for SMEs often fails to address the sheer breadth of the market. In South Africa alone, the term covers everything from a one-woman grocery stall to a business with R400m ($23m) turnover and over 100 employees. The South African banking sector has done a solid job of serving a large swathe of the domestic SME space. But the smaller the business, the more traditional banking coverage drops off.
Karl Westvig, CEO of digital lender Tyme Bank, says that incumbent banks typically serve businesses with turnover of R10m - around $580,000 - and above. This has left the smaller and micro enterprises in serious need of help. When it comes to SME lending, however, the non-banking sector has stepped up. Westvig was a founder of Retail Capital - a dedicated SME lender that Tyme Bank acquired two years ago. The solution introduced by Retail Capital was cash flow lending.
“Traditional banks are asset or security-based lenders,” says Westvig. “They will [only] give you money as long as you put some security behind it.” Retail Capital on the other hand, looks at a firm’s business turnover, estimates what they could afford to borrow and provides that in working capital.
“The easiest way to lend is to monetise what we can see,” says Westvig. “We see debit card transactions, we see credit card transactions, we know what their card turnover is on a monthly basis.” The firm typically provides up to 100% of monthly card turnover. Repayments - around 8%-12% of monthly card turnover - are collected directly out of the firm’s cash flows. And because Retail Capital is a cash flow-based lender, it can fund businesses at any level - whether turnover is $500 or $50,000. “So long as we can see the turnover, we can fund it,” he says.
Lean and green
Traditional banks might lack the innovation and agility to tap a similar business model. But this does not mean they cannot - and have not - put their weight behind the shift. Neobank Tyme acquired Retail Capital. Mercantile Bank - a dedicated SME lender - was acquired by Capitec Bank in 2019. Africa’s largest lender - Standard Bank - became a shareholder in SME lender Merchant Capital in 2018.
Other lenders have built their own capability internally. Nedbank created a service it calls Gap Access - a cash advance for SMEs based on a business's previous point-of-sale (POS) volumes. Fees are set at 15% of the advance - with no interest payments - and the advance can range from R30,000 to R1.5m.
In August this year, Nedbank together with South Africa’s small business development agency Fetola, JP Morgan Chase and the Finnish Embassy launched a new digital platform for green SMEs called Hloolo. Fetola CEO Catherine Wijnberg highlights the difficulty that SMEs looking for smaller volumes of funding encounter. A new Fetola study found that over 70% of SMEs need less than R1m in funding - a little less than $58,000. This, she says, is large for microfinance but too small for commercial banks. The Hloolo platform aims to act as a matchmaker linking green SMEs with growth opportunities, while skills and capacity building.
Ultimately, without additional public sector support or subsidy, the cost of the business model will determine how much SME funding a firm can disperse. The good news is that digital innovation has made business models cheaper than ever. Retail Capital found that one limiting factor was the cost of visiting small retailers through an agent network where agents work on commission. This essentially set a minimum floor of R50,000 for cash advances.
But partnering with acquiring banks and payment providers like Yoco and Sureswipe has made accessing the necessary cash flow data far easier. “They share the data with us so we can see turnover levels across the whole base,” says Westvig. “We pre-score the merchants in order to provide the facility available and it is frictionless.” This is what allows Retail Capital to provide cash advances of just R20,000. The amounts may seem small, but funding is growing significantly. Westvig says Retail Capital has provided more than R10bn over the last 13 years, with R3bn in 2023 alone.
Closing the gap
SME banking - as opposed to simply funding - is a slightly different issue. The main problem is that there is one set of fees for a personal account, and another that is around five times higher for a business account. Business account pricing compared to essentially the same functionality understandably puts clients off. Access to business banking is a separate, but related, issue to access to funding. Like the funding problem, it is largely being solved by digital disruptors.
Digital lender Bank Zero has made low fees across personal and business banking its signature move. The firm provides free basic banking services for businesses and a specific business banking app that allows it to perform tasks like downloading transaction history and setting up business debit cards for employees.
Independent analysis from South African media firm Moneyweb found Bank Zero’s fees are around 85% lower than the country’s main incumbent banks. Tyme Bank also offers low-cost business banking for sole proprietors, though not yet for other structures like closed corporations or partnerships. Earlier this year, Capitec Business introduced new pricing for its transnational business account - a R50 monthly fee and the same transaction fees as retail customers.
Despite the growing momentum behind low fee, accessible business accounts there are still many SMEs left to reach. “We still see many SMEs being banked through personal accounts and borrowing through personal loans,” says Westvig. “But the gap is being closed.”