Scoping The Post-COVID Payments Landscape for SMBs

The Payment Podcast Transcript

John Gaffney: Greetings, and welcome to the Payments Podcast. My name is John Gaffney, I’ll be your host for this episode which continues our discussion of Bottomline’s Business Payments Barometer.

The barometer’s now in its seventh year. And as we’ve mentioned on previous episodes, it’s the first year that the United States has been added to the project that was once reserved for the UK.

This move doubled our sample size which totalled 1,600 respondents and it also gave us the ability to include experts from both sides of the pond so to speak, and that’s what we have here today.

The topics, how can small and medium sized businesses navigate the post pandemic economy, the ever-changing place of financial relationships in that economy and how can they protect themselves against payment fraud that continues to plague businesses of any size.

So in the spirit of the expanded scope of our project, we’re excited to have experts from the leading small business associations in each country.

From the UK we have Daryn Park who is Senior Policy Adviser for the Federation of Small Businesses. Welcome Daryn and how about an elevator pitch on what the FSB does and your role within it?

Daryn Park: Hi, thank you for having me.

So the FSB or Federation of Small Businesses is the main lobby group for small businesses in the UK. We have approximately 160,000 members and we work across all the different policy areas in the country.

We’ve got policy advisers on finance and tax, which is what I cover, but equally we also have advisers on immigration, skills, net zero, local government and so on and so forth.

Our main purpose is for advocacy so we run surveys, write reports, have stakeholder engagements and we lobby politically to try and get the best outcomes for small businesses in the UK.

John Gaffney: Alright, great. And we’re going to get into what some of those issues are in just a little bit after we hear from Amy Bassett who is the Regional Director for the United States Small Business Administration. We’re very happy to have a government agency from the US on here.

So Amy, same opportunity as Daryn, in your view what does the SBA do and tell us about your role within it please.

Amy Bassett: Sure, thank you so much for having me join today.

So as you mentioned, SBA is an independent federal agency but there’s actually a physical presence in every state. So I currently am the Director for the Small Business Administration in New Hampshire.

And how the SBA helps small businesses and those who want to start small businesses is that we have a wide variety of programmes and services that we deliver and that we are helped in delivering, through a network of partnerships.

And then the ways that we help would be helping businesses get greater access to capital, helping them get access to business advising services and technical assistance as well as trainings.

And then we also have programmes in the area of helping businesses who want to do business with the government, government contracting. And then lastly, where we’ve spent most of our time since March of 2020 is in the area of disaster assistance.

We’ve been very busy since then trying to help deliver the programmes that have been stood up to help small businesses survive the pandemic and build greater resiliency.

John Gaffney: Which I’m sure having covered that over the last couple of years, I’m sure it’s greatly appreciated.

So we have these pretty obvious concerns but Daryn, when I get away from economic concerns right now what are some of the issues, other issues, that small businesses are dealing with right now?

Daryn Park: Yeah, I mean I guess it’s hard to steer away from the big elephant in the room, but I think one of the biggest problems small businesses in the UK are facing at the moment is to do with energy prices.

I’m sure you’ve seen over the last few months as a result of what’s happening in Ukraine the cost of energy and cost of gas specifically has just skyrocketed. Small businesses specifically don’t have the same consumer protections of price caps, so they really have been facing the brunt of month on month increases to their energy costs. So much so that it’s really taking away their profit margins to quite an extreme level.

Liz Truss has announced that some support measures will be announced in the next few weeks but what those will be are still yet to be heard.

The other thing we’ve seen over the last few months getting worse is the issue around late payments. Small businesses I guess by virtue of their size just don’t have the same leverage as large businesses. And not wanting to lose their suppliers or who they’re selling to often again face the brunt of long, long payment terms which again leave them with very little cashflow and capital at their disposal.

John Gaffney: Interesting. Amy, has that tracked through your experience here in the States?

Any Bassett: I would say it’s very parallel. It’s very interesting but many of the issues Daryn raised are parallel here.

We are certainly hearing from small businesses about the rising energy costs as well as the cost of goods that are going in to their products as well as supply chain issues that impact their ability to build their products, deliver their services and complete orders in a timely fashion.

But the main issue we hear from small businesses is workforce, workforce is a very acute issue across the board and it’s still perhaps some ongoing effects from the pandemic.

People have changed work environments and the way they look at work, but we are hearing of acute challenges from small business in regards to that.

John Gaffney: Yeah, and I think you said on our prep call that you’re seeing businesses actually close because of it, no?

Amy Bassett: Absolutely, businesses completely closing. They’re just fatigued and that’s just the final straw I think is that they can’t get the help and they can’t do it on their own or they’re curtailing hours significantly. Really significant impacts.

John Gaffney: Wow, interesting. So Daryn, you mentioned payments. I’m curious to know how much the FSB works with financial institutions in fintech as part of your remit.

Daryn Park: Yeah, so the FSB has an affiliation with the Co-op Bank, a commercial relationship with that specifically. But in terms of the stakeholder and policy advocacy side, we also have quite strong relationships with the main high street banks and some of the smaller ones.

That’s something I do as part of my role. I have regular meetings with the British Business Bank which is the government funded bank for small businesses as well as the main high street ones such as Barclays, HSBC and NatWest.

All again raising the points I said earlier, the state of affairs of small businesses. The main issues they’re facing and how we can work together to create a positive environment with there being late payments, access to cash, closure of bank branches and so on.

So, yeah, we do have quite a positive relationship with a lot of the banks and it does work well to advance our aims I suppose.

John Gaffney: And you also mentioned earlier that you guys have a good relationship with trade groups. I’m interested to know how they help. How do you see trade groups in general in a situation like this and FSB in particular, where do you fit?

Daryn Park: So FSB’s got quite a unique position in the political lobbying sphere in the UK. Given that we’ve got about 160,000 members, we are by far the largest membership group and we are spread throughout the UK.

Having that network of businesses that feed in from a very grass roots way often means that we can have the canary in the coalmine if I want to use a phrase like that. We hear a lot of issues from the businesses directly first before government may even be aware of what the issues are. This means we can start actively lobbying for and being proactive on the issues these businesses are facing.

One such example of this was during the pandemic when the government announced its relief packages. The first relief package it announced was the minimum loan which was just too large for most small businesses, which we started hearing directly.

This meant that we could create a policy idea that we could take forward to government and do that in a very quick way but with a very evidence backed approach which gives us the reputation and reliability that we’ve come to gain.

John Gaffney: Interesting. So Amy, we established that the economic obstacles are pretty similar, what about banking relationships, how does that track with what Daryn was saying?

Amy Bassett: So one of the interesting things that came out of the pandemic is we realised what we always knew, but I think small businesses realised, that it was very important to have some type of a banking relationship.

The way the programmes rolled out, those who had a strong banking relationship were able to access the programmes more quickly.

SBA recognised this and recognised that some of the ones that did not have the relationship with a lender were the ones who needed it most and needed the help the most.

So we did work to establish more online technologies and establish connections with online lenders and fintech’s to make sure that we are starting to think about delivering services through other platforms so that the smallest of the small businesses get access to the programmes as well.

John Gaffney: It’s startling to me that you could not have a banking relationship or an active one as a business. How do you guys try to spread the gospel or advocate for having one of those relationships?

Amy Bassett: I would say we have always told anybody starting a small business or in a small business how key it is to have those advisers, whether it be a banking or some kind of financial adviser and a banking relationship is a key part of that.

So we’ve always reiterated that to people, but I think it’s a sign of the times, everyone has gone more technology based and trying to streamline things. There aren’t as many banking locations that they would access, so I think it’s a culture shift to a certain extent.

John Gaffney: Interesting. And Daryn, I know in the UK that one of the issues has been bank branch closures, is that true?

Daryn Park: Yeah, that’s something we’re seeing throughout the country up and down. It’s particularly painful in rural areas where you often get the last bank in town closing down, really leading a gap in financial services for businesses in the area.

I think because of that and because of how long this issue has been going on for, you do have many small businesses that really don’t have a financial relationship at all. They will have, say, a business banking account but the personal touch I guess is something of the past for a lot of businesses now.

John Gaffney: Yeah, interesting. Tell me a little bit about the relationship between some of your constituents and what we call business bounce back loans in the in the UK, right?

Daryn Park: The bounce back loan, yeah. So the bounce back loan just for anyone who doesn’t know, was the government COVID loan for the smallest of businesses. So you could take up to £50,000 depending on what your turnover size was.

This has been a very successful loan in my view. It was rolled out very rapidly at the start of the pandemic. It had about 1.5 million business uptake, approximately £45 billion worth of lending. It really was a lifeline for businesses that were going into a very dire situation.

And even the latest stats now show that it’s still being paid off relatively well. I think about £6 billion has been paid off outright and about £30 billion or so has been paid off with no problems at all in terms of the monthly repayments. So it really was this lifeline for small businesses.

I guess the issue going forward and what needs to be taken into consideration is a lot of businesses took this debt on as the lifeline approach where they may not necessarily have taken on debt for the first time otherwise.

The loan lasts up to ten years depending on the agreements made.

So businesses are facing these economic headwinds at a time where they’re also facing debt repayments and debt repayments quite large that they may not normally be used to.

How the government proceed with financial institutions it really needs to be taken into consideration that these small businesses are very indebted, more indebted than they have been in the last few decades.

John Gaffney: Yeah, that’s unfortunate. I’m interested to know from both of you, Daryn in particular you mentioned payments and payment terms. One of the things that came through in the Barometer report was that businesses have had to become much more flexible in the payment types they receive or make.

And Daryn, I want to start with you because you mentioned that you have seen some of that, you’ve seen some changes in terms and even changes in payment types is that true?

Daryn Park: Yeah, so during the pandemic a lot of businesses faced a worsening in the payment terms. Irrespective of how they were paid, the number of days from when the goods were sold or service was sold to when they receive payment we found when it increased for about two thirds all small businesses.

Again, restricting cashflow which we really try and fight against, I mean the cashflow is kind for small businesses and late payments really needs to just be improved in the UK.

The other side in terms of forms of payment that we saw changing was an acceleration of cashlessness. I guess the perception that cash could potentially house the COVID disease meant that a lot of businesses stopped accepting and then just went cashless.

And although it’s not necessarily a bad trend, it does mean that the options of payment, shall I say, is becoming slightly more limited throughout the UK.

This is again very detrimental I suppose to some areas, the more rural specifically that don’t really have or lack the same level of infrastructure of more urban areas to be able to adequately accept this more cashless society world.

We’ve seen an adoption of open banking and the different payment forms of that, but it’s still largely unknown by small businesses. If you go down the street and you talk to someone about open banking there’s a very high chance they’re not going to know exactly what that actually entails even if they are using some of the processes within it.

So I’d say on that front on the alternative payments form, we’re at very early stages in the UK of it.

John Gaffney: Interesting. So Amy, it’s not as easy for businesses as it is for consumers to be automatically shifting to cashless payments and peer to peer payments, can you talk about that a little bit?

Amy Bassett: Sure. I think in the States it’s been a shift towards using the card, using the plastic versus online transactions versus cash, but it certainly was accelerated in the pandemic. I think the hurdle for small businesses, the technology piece that has to go along with that, that’s an investment for many of these small businesses. There’s a cost associated with setting up the systems and training and that’s definitely a hurdle for small businesses.

And we’ve also seen some that are trying to still focus on the cash basis because they feel not only can they not invest in the technology to make it happen, to go cashless, but the cost savings as well when the costs are associated with cards and the like.

John Gaffney: Okay, final question and we’re going to go to Amy Bassett for this first. Let’s take it out to 30,000 feet here Amy, what are some of the priorities you think SMBs should be adopting right now? What questions should they be asking of themselves?

Amy Bassett: So what we have always said and what we continue to say is there are a lot of resources available out there, take advantage.

I think sometimes business owners get so engrossed and ingrained in operating their business that they don’t think about working on their business, so that is one of the lessons that we try to get out to folks in many, many ways.

And we also realise that there are some small businesses in rural and underserved communities who just don’t have the means to do that. So the onus is on us to make sure that our services are reaching these small businesses.

And then the last thing that’s really popped up on our radar most recently is the whole topic that we were talking about partially today is cybersecurity. There’s a lot of risks out there and SBA has just launched a programme to start doing some work around educating small businesses on this.

One of the stats we’re quoting is the FBI’s crime report for the cost of cybercrimes was startling. $2.4 billion in 2021 is what it cost small businesses so big area focus.

John Gaffney: Yeah, those are shocking numbers, they do a great job.

Daryn, you get the last word out of respect to our mother country here, same question for you, what questions should small to medium sized businesses be asking themselves right now?

Daryn Park: I think one of the first ones many small businesses will be looking at is again on the access to finance issue. With the level of debt many small businesses have taken on over the last two years, where they go for external finance will start popping up as a new question. Many not wanting to take on additional debt but many still wanting to grow but not being able to grow without the external finance and external capital.

So looking beyond traditional bank loans, potentially looking to equity crowdfunding or angel investments I think is going to become increasingly important.

It’s something we’ve seen from our own research that many small businesses are just either a combination of unaware of the available options or just unaware of how to access them. And I think bridging that gap is going to become very important in light of the debt taken.

This will also be very important as well given the fact that in the UK at least following the financial crash of 2008 we saw a very, very sharp tightening in the lending to small businesses as banks reduced their risky portfolios.

I don’t see that necessarily happening to the same level as the credit crunch but I can see a tightening of the financial markets in the UK, indeed, our own data is showing that already.

The share of small businesses that are applying for finance and being successful is dropping quarter on quarter. Our latest data shows that only 45% were actually successful in their applications.

So I think growth is always something business want but it’s how I guess they’re going to find the capital for this growth over the next 18 months is going to be one of the crucial questions.

John Gaffney: Yeah, how do they get there? Well, it’s good that on both sides of the pond here that SMBs have the organisations like you guys have and that those assets are available to them.

So that’s a wrap for this episode of the Payments Podcast. Daryn Park, Senior Policy Adviser for the Federation of Small Businesses in the UK, I want to thank you for your time.

Daryn Park: Thank you for having me, it’s been great.

John Gaffney: No, it’s been great. And Amy Bassett, Regional Director for the Small Business Administration, thank you Amy.

Amy Bassett: Thank you.

John Gaffney: And I hope you guys tell everybody about this podcast, it’s been excellent and it is available on SoundCloud, Apple and Google Podcasts so thank you once again, see you next time.

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