Today’s economy needs new payment services for SMEs – here’s why.

However, the popularity of instant payments with small and medium enterprises (SMEs) is less well publicised – yet such payment types are growing as fast as their consumer equivalents. In Great Britain, UK Finance tell us that 39% of all business payments were instant in 2021[1]. Meanwhile, 1,300 German Banks now offer instant payments to their corporate clients – more than 93% of all banks[2] in the country – while a recent estimate suggested[3] that the French economy would benefit from a 2.8% boost to GDP thanks to the use of instant payments by SMEs. Although the Nordics, the Netherlands and the UK have led Europe, other markets – especially Germany and France – are catching up fast in terms of SME instant payments.

Instant payments: vital for survival

Instant payments aren’t just convenient and fast for SMEs: they matter for survival as the economic landscape changes and the need to generate cash more rapidly grows. At present, interest rates have risen from near zero to around 4.25% in the UK and 3.5% across the Eurozone. This shifts the cost of money for SMEs from almost nothing to a significant balance sheet factor. An SME with a loan facility of €200,000, for example, might now expect to pay an interest rate of around ten percent on that money – quite some cost for a business with a turnover of between €500,000 and €1 million.

“the need for more efficient working capital will drive new payment options linked to Open Banking.”

In this economic context, SME’s requirements are changing. As well as the capacity to receive and settle funds rapidly provided by instant payments, they also need to make their working capital generate value more efficiently. At Tietoevry, we expect this to be a catalyst for new payment options that help businesses to generate more revenue by offering more flexible payment choices to customers. Furthermore, we expect many of these services to be linked to rapid growth in Open Banking. The implication is that banks, fintechs and other providers will face greater competition – and must be ready to respond.

From instant to open

Spearheaded by fast-growing Asian economies and now emerging in Europe after the implementation of PSD2, Open Banking will deliver a revolution in choice, cost and efficiency over the next decade. Given the current economic climate, we expect Open Banking services for SMEs and corporates to emerge more rapidly than their consumer equivalents. That’s because demand is soaring from corporate clients for payment services delivered through open APIs that add value.

Examples of the new services we expect to see launched include variable recurring payments (VRP) and Request to Pay (R2P). Variable Recurring Payments (VRPs) let customers safely connect authorised payments providers to their bank account to make payments on their behalf in line with agreed limits. In essence, these enable one-click payments for monthly accounts with retailers, membership clubs and subscription services where the amount owed changes from month to month. They offer more control and transparency than a monthly direct debit or card-on-file payment, since the consumer can alter the amount paid, rather than paying a set amount each month. From an SME’s perspective, VRPs can be cheaper than direct debits or card payments, and offer their customers attractive levels of clarity and control. VRPs will be introduced in the UK later this year (2023) and we can expect them to be rolled out in other European markets soon.

“banks should be developing open API architectures and next-generation payment services to meet the Open Banking needs of European SMEs”

Request to Pay is another revolutionary development which promises to eliminate complex onboarding requirements for one-time or infrequent payments. This involves a payee initiating a request for a specific transaction from a payer. The system provides a digital request that the payer can receive on their mobile device. This could arrive on a mobile banking app, or via a third-party fintech. A payer is then able to accept or reject the payment request. The request to pay can also include transaction details, due date and other invoicing information. If the payer approves the payments, a real-time transfer is initiated to the payee. The transaction is enabled between two parties without the need for to remember or enter full account details, while remaining fully secure – and featuring instant settment.

To prepare for these innovative developments, banks should be developing open API architectures and considering international standards in Open Banking such as the UK’s open API standard or NextGenPSD2, an Open API set developed by the Berlin Group. They should also be looking to partner with experienced providers on the development of next-generation payments services that will meet the needs of Europe’s SMEs – traditionally an under-served segment that will be looking for more sophisticated services from their banks in the future.

[1] UK Finance, August 2022, “UK Payment Markets Summary 2022”: https://www.ukfinance.org.uk/system/files/2022-08/UKF%20Payment%20Markets%20Summary%202022.pdf

[2] See: https://ec.europa.eu/eurostat/cache/digpub/european_economy/bloc-3d.html?

[3] PYMNTS, 1March 2023: “European Real-Time Payments See Historic Growth”: https://www.pymnts.com/real-time-payments/2023/european-real-time-payments-see-historic-growth/