UK SMEs eye global expansion despite banking challenges

A new report from fintech company IFX Payments has shed light on the increasing ambition among the UK's small and medium-sized enterprises (SMEs) to expand internationally, despite the challenges they face in the current financial landscape. The "Moving Money" report highlights that four in five SMEs (78%) plan to increase their international dealings over the next year, a trend spurred by the aftermath of COVID-19 and Brexit.

However, the report warns that these ambitions could be hindered by ring-fencing regulations that have been likened to the threat of "debanking." These rules, introduced to separate banks' retail and investment activities, often prioritise larger enterprises, potentially marginalising smaller firms. This comes in the wake of critical observations by the Treasury Committee, which highlighted how banks and regulatory measures are making life difficult for UK start-ups and small businesses by closing business accounts.

The Moving Money report, based on comprehensive interviews with finance directors across the UK, uncovers the dual challenges and opportunities faced by SMEs in cross-border payments. The survey found that 64% of SMEs plan to expand their business activities within Europe, despite the new trade barriers that have arisen following Brexit. Additionally, three-quarters (76%) of respondents noted their intention to engage more in hedging against foreign exchange risks, highlighting a keen awareness of the impacts of geopolitical events such as the Ukraine conflict and the Israel-Gaza war on currency markets.

The report delves into the impacts of ring-fencing regulations, which have grouped most small firms with less than 50 employees or a turnover of less than GBP £6.5 million within the retail arms of banks. This arrangement prevents their deposits from being used for investments, reducing the profitability of these accounts for banks. As a result, services to business customers have deteriorated, with over 140,000 business accounts closed by major banks last year, equating to about 2.7% of SME accounts held by the UK's largest eight lenders.

While the reasons for these closures range from financial crime concerns to non-compliance with information requests, the lack of transparency by banks regarding their risk assessments poses questions about fairness. Only three of the largest banks have disclosed their data on risk appetite, prompting calls for greater openness and consistency in their actions.

In a February report, the All-Party Parliamentary Group on Business Banking noted that servicing the bulk of SMEs is often not profitable for banks, given the additional compliance costs. This economic reality leads many banks to avoid taking on such customers. The group suggested that with complexities like overseas taxation and licensing, SMEs looking to trade internationally might be exposing themselves to greater risks of debanking.

Last month, the Westminster Treasury Committee argued that SMEs with legitimate businesses should have access to bank accounts and called on the Financial Conduct Authority (FCA) to provide clear guidelines on criteria such as reputational risk within ring-fencing regulations. It emphasised the need for less burdensome financial access for small businesses.

The Moving Money report further revealed that 70% of UK SMEs still rely on banks for foreign exchange services, often incurring higher costs than when using fintech alternatives. Speed of transaction management was a top priority for 37% of those surveyed, followed by cost-effectiveness (33%), hinting that many firms are not exploring more competitive options available through fintech providers. This point was echoed by Graham Ridley, Strategy Director at IFX Payments, who highlighted the loyalty penalties paid by SMEs for staying with banks.

Will Marwick, CEO of IFX Payments, remarked on the importance of supporting SMEs, particularly as they are crucial to the UK economy and its trade strategy. He emphasised the optimism among SMEs about international trade despite past challenges, but also the significant barriers posed by current payment processing complexities.