Gertrude Tumpel-Gugerell: Thinking small first - how does it apply to the
financing conditions and payments of small and medium-sized
enterprises?
Speech by Ms Gertrude Tumpel-Gugerell, Member of the Executive Board of the European
Central Bank, at the Annual General Assembly of UEAPME, the European Association of
crafts and small business, Brussels, 2 December 2009.
* * *
Ladies and gentlemen,
When I open a financial newspaper, the headlines are all about large companies, their
activities and annual reports. We tend to be attracted - and distracted - by large things, by
large companies with large numbers. It is easy to forget that the life-blood of the economy
runs in smaller companies which are much more important to society than their actual size
would suggest.
Small and medium-sized enterprises (SMEs) are a fundamental part of the euro area
corporate sector. They account for 99.8% of all businesses, roughly 60% of gross value
added and about 70% of total employment. The UEAPME represents around 12 million
European small and medium-sized enterprises, employing some 55 million people. These
are large figures and of great importance to Europe.
The importance of the SME sector is being more and more acknowledged in European
policies. The European Commission made the point strongly when it launched the Small
Businesses Act last year, stating that "vibrant SMEs will make Europe more robust to stand
against the uncertainty encountered in the globalised world of today". According to the Act,
the "Think Small First" principle should apply to all public policies, including arrangements
made to facilitate SMEs' access to finance and to support timely payment in commercial
transactions.
In my speech I would like to address two important issues related to the economic situation
of SMEs. First, I will talk about how SMEs have been affected by the recent crisis and their
specific financing situation. Given the mentioned importance of SMEs for the overall
economy, this seems to be a crucial issue to look into to assess the future prospects of the
euro area economy, particularly with respect to where we stand in moving out of the current
crisis.
Second, I would like to highlight the many advantages and benefits of more harmonized and
integrated payments markets specifically for SMEs. Being the main user of the retail
payments business, SMEs are absolutely key for the further harmonization and integration
process. Therefore - and let me give you this key message already up front - SMEs can
make a crucial contribution by using harmonized payment products to the overall speed of
the integration process.
SMEs' financing conditions under stress
Let me start, first, with how SMEs have weathered the crisis and would therefore like to take
a closer look at SMEs' financing conditions. The resilience of our economy in the period of
the financial crisis is crucially dependent on the ability of SMEs to appropriately provide for
their financial needs. Unfortunately, very few quantitative statistics are available. Therefore, I
am happy that direct evidence regarding SMEs' access to finance is now available from a
new, large-scale survey implemented jointly by the ECB and the European Commission, the
first wave of which was conducted in July this year.
When asked what type of external financing they would prefer to use in order to fund growth
opportunities, 70% of SMEs replied that they would apply for a bank loan. Hence, the
financing conditions of SMEs are closely linked to the situation of the banking sector, i.e. the
lending rates and the availability of credit. For us at the ECB, this aspect of the SMEs'
financing structure is absolutely crucial for our assessment of the monetary policy stance and
the transmission of our monetary policy decisions to the economy at large.
During the crisis, securing financing has proven difficult for many SMEs and a source of
serious concern for monetary policy. Let me take this opportunity to stress that the decisions
taken by the Governing Council of the ECB in terms of monetary policy and the support of
the banking system via our refinancing operations have been instrumental in preventing the
risk of credit drying up completely.
Nonetheless, it is clear that SMEs have experienced a severe deterioration in their economic
environment over recent quarters and have seen their access to finance significantly
constrained.
SMEs have been widely affected by sluggish demand and a slump in export markets. At the
same time, they have also been affected in their role as suppliers, sub-contractors and
service providers to large firms which themselves were struggling with economic difficulties.
According to the survey evidence, SMEs experienced a significant deterioration in their
turnover and profits in the first half of 2009, and they were more adversely affected by the
crisis than large companies. Indeed, a higher net share of SMEs than of large firms indicated
that their capital base had deteriorated. Of course, the economic uncertainty and
unfavourable outlook was anything but conducive to an increase in firms' demand for loans.
At the same time, the deteriorating situation of firms and particularly the uncertainty
surrounding their economic outlook also made banks increasingly reluctant to grant loans to
SMEs. Moreover, the financial crisis has put a strain on banks' balance sheets, leading them
to increasingly tighten the terms and conditions for granting credit.
Therefore, the combination of lower demand for loans, on the one hand, and tighter credit
supply conditions, on the other hand, has led to a decline in the annual growth rate of loans
to enterprises. In the euro area loan growth declined from 17.5% in the last quarter of 2008
to about 2% in the third quarter of 2009.
So how bad has the situation been for SMEs? Let me briefly give you the answer to this
question based on the evidence from our SME survey conducted on cooperation with the
European Commission. Our survey evidence reveals that, amid exceptionally adverse
economic and financial conditions, 77% of SMEs that applied for a bank loan in the first half
of 2009 received some or whole amount they had applied for. As I mentioned, this is a new
survey. So, it is not yet possible to compare these data over time, and hence, makes it
difficult to assess whether the bank loan rejection rates indeed indicate severe supply
constraints. In fact, even at times of sound economic growth, some bank loan applications
will be rejected, for instance owing to the lack of a convincing business plan.
Nevertheless, the survey has also shown that 43% of euro area SMEs that had applied for a
bank loan reported a deterioration in the availability of loans in the first half of 2009. This
seems, in particular, point to increases in charges, fees and commissions or tighter
procedures, collateral requirements and other types of required guarantees. Interestingly,
large firms were somewhat more negative in their assessment of bank loan availability, with
nearly 50% reporting a deterioration. Still, I believe, it has become clear that firms' access to
finance came certainly under pressure during the current financial and economic crisis.
Looking further ahead, we expect that the growth of loans to enterprises is likely to moderate
further before starting to recover. This, however, is in line with past recession patterns. We
know that the growth of loans to non-financial corporations normally tends to lag real GDP
growth by about three quarters. This is usually linked to the fact that firms tend to make use
of their internal funds first before turning to external financing. So overall, once the severity
and duration of the economic slowdown are taken into account, recent credit developments
appear to be broadly in line with historical patterns. As a note of caution, let me emphasize,
however, that there are still uncertainties ahead so that the full impact of the crisis is yet
unknown.
Let me still mention that we see several positive signals ahead. Indeed, the most recent euro
area Bank Lending Survey, released last month, confirms that banks' liquidity position is no
longer a factor tightening credit conditions, which had been the case up to the first quarter of
2009. The positive message we can take away from our Bank Lending Survey is that credit
conditions - though still tight - do not show any signs of further tightening as the funding
problems of banks are solved with the support of the ECB policy measures.
Also the evidence from the SME survey reveals some cautious optimism regarding the
availability of finance in the second half of 2009, at least in a majority of euro area countries.
More than one year after the financial crisis intensified dramatically in September 2008, we
can see increasing signs of economic stabilisation in the euro area and there are reasons to
believe that a gradual recovery lies ahead. This will mean new opportunities for all of us and
for all of you to seize.
The benefits of integrated payment systems in Europe
In addition to access to finance, the European Commission's Small Business Act identified
liquidity constraints as a problem for SMEs. The integration of European retail payment
markets will for one part contribute to eliminating this problem.
But most importantly, further integration will make payments more efficient and will bring cost
savings to all firms and citizens in Europe. Around 50% of euro area exports and imports are
within the euro area countries. When payments for this trade can be made in the same - or
even more - efficient and low cost way as national payments, the benefit for the European
economy is evident.
Indeed, the vision for the Single Euro Payments Area - SEPA - is for all European payments
to be treated in the same way as domestic payments, with no difference between national
and cross-border payments in euro. This will be achieved by using a single set of payment
instruments which are as simple, safe and efficient as those used in the national context
today. Today, we can trade goods and services without borders in Europe; we also use euro
as our single currency; we must also have borderless and fully harmonized payments to
complete the Single Market.
On January 2008 we introduced the SEPA credit transfers and the European cards
framework. Only one month ago, we celebrated the launch of the SEPA direct debit, a truly
new payment service at the European level. At the same time, the PSD went into effect
which contributes greatly to the harmonization in the retail payments markets.
So what does all this mean for the small and medium sized companies?
At one of the SEPA conferences that I recently attended, a CFO of a medium-sized travel
agency gave a presentation on her SEPA experience. She told us that when she received
the SEPA brochures, her first reaction was rather hesitant. She wondered whether new
burdens were being put on small companies. But when she started to understand what
SEPA is all about, she became more and more enthusiastic. She realised how her company
could directly benefit from cheaper and faster payments, from a simplified account structure
and from using a single banking software application for all her euro payments.
I do not think that this company is an exception. At first glance, the harmonisation of
European retail payments may seem like a mandatory replacement of existing products and
admittedly implies that we need to get used to new standards and procedures. But when
looked at more closely, the true benefits start to reveal themselves.
SEPA is a market-driven process which is strongly supported by the authorities like the
European Commission, the National Central Banks and the ECB. To complement the
common payment instruments, business rules and standards developed by the European
Payments Council (EPC), the European Commission has issued harmonised legislation on
payment services and euro-denominated cross-border payments. The combination of
common standards, common payment instruments and a harmonised legal framework will
benefit small and medium-sized companies in at least four ways:
First, it provides legal certainty all over Europe. This means that irrespective of where the
company and its customers are located in Europe, there is no additional risk stemming from
the existence of different payment rules and customs. Hence, trading across borders
becomes more certain. In my view, this will remove one more important barrier from doing
business Europe-wide.
Second, the faster execution of payments will enhance the cash flow and liquidity of
companies. In the past it has taken up to five days or even longer for a payment to reach the
beneficiary's account. This has been the case for some national payments, let alone
crossborder payments. The SEPA credit transfer will ensure that all payments in Europe are
credited to the beneficiary in a maximum of two days and, from 2012, in accordance with the
Payment Services Directive, in just one day. In addition, no value dates are lost as the
payment will be credited to the beneficiary's account as soon as it is received by the service
provider.
Third, fees for cross-border payments cannot be higher than those for similar national
payments. This is ensured by the regulation on cross-border payments. The harmonized and
integrated European payment market will be a key driver for more competition, leading to
lower costs, enhanced services and more innovation. This may also encourage the
development of SME-specific services as there is now a Europe-wide market for them.
Fourth, standardisation makes the processing of payments simpler. Cross-border payments
no longer require any additional effort. All companies have the option to make use of more
inexpensive banking software and integrated accounting and reporting applications.
Evidence from the Nordic market indicates that common standards have enabled even very
small companies to use e-banking and related applications. The standardisation of payment
card transactions means that payment card terminals will also conform to a European
standard. Merchants will benefit from competition between terminal manufacturers and
between acquirers.
All these benefits - legal certainty, enhanced liquidity owing to faster payments and no lost
value dates, competitive services and standardised payment terminals and banking software
- will be available to all companies - big and small - conducting cross-border business or
operating locally.
But this is only the starting point for further developments. The European e-payment solution
will offer further benefits. Also SMEs are increasingly using the internet as a channel for
doing business. Growing numbers of consumers, especially young people, prefer to use the
internet and e-commerce to make purchases. In countries such as Germany, the
Netherlands and Austria, safe and efficient e-payment schemes are already available, but in
many countries they are still lacking. With a common European e-payment scheme, both
consumers and merchants will have a more secure way to pay. The Eurosystem has strongly
encouraged the EPC to work on a SEPA solution for e-payments. This will also benefit very
small enterprises, many of which operate in the services sector and need to use an easy and
low-cost payment terminal or internet banking.
But how can we achieve these benefits? Making use of the opportunities that SEPA offers
may simply require the use of the IBAN and BIC instead of national account identifiers.
Countries such as Italy, Latvia, Luxembourg, Poland and Romania have already successfully
switched to using these account identifiers without a problem. Banking software may need to
be updated, but this can be accomplished in the course of the normal investment cycle of the
firm in question. In my view, the transition costs are certainly outweighed by the benefits
stemming from faster and cheaper payments, legal certainty and the ease of doing business
throughout Europe.
I sometimes hear the question: Is it really working? Are banks really delivering? All the
building blocks for an integrated retail payment market are in place. It is important that
customers too demonstrate demand for SEPA benefits and urge their banks to make SEPA a
reality. Small and medium-sized companies should aim for the benefits of SEPA.
Conclusion
Europe has come far in terms of integration. The Single Market for labour, goods, services
and capital was fully established 16 years ago with the Maastricht Treaty. This Single Market
now requires a single market for payments. The European retail payment systems will be
integrated by means of common standards, common payment instruments and common
business rules and conditions. The SEPA project is an integral part of this process. I
highlighted four main benefits for end-users, which include SMEs.
•
The legal certainty regarding payments will remove another important barrier to
trade
•
faster payments will improve liquidity conditions for all companies
•
enhanced competition in payment services will contribute to lower costs and will be
a key driver of innovation and
•
standardisation will provide easier access to banking software and payment
terminals, including for SMEs.
Given these tremendous potential benefits arising from SEPA and the overall harmonization
process, we need to make a further leap forward in the SEPA implementation. This entails
existing SEPA instruments, the credit transfers and direct debit, but also innovations in the
field of eSEPA, such as e-payments which can greatly benefit the payments business of
SMEs. The take up of the SEPA products - until now - is rather modest. The ECB is
convinced that a binding migration end date for SEPA is needed. It is in the interest of all
stakeholders to migrate quickly to the SEPA instruments.
And let me emphasize - once more - that also SMEs as key users of payment instruments
can make an important contribution to the successful implementation of a harmonized and
integrated retail payments market.
The financial crisis has put severe strains on SMEs and I have mentioned the results of our
survey on the access to finance of SMEs conducted jointly by the ECB and the European
Commission in this respect. Therefore, on the one hand, I understand that in difficult times
changes are not always easy to bring forward. On the other hand, times of distress open up
new opportunities and make change even more necessary.
The lesson we learnt from the crisis is that we need to better safeguard the stability and
resilience of our financial system. I am convinced that efficient and harmonized financial
markets can make an important contribution in this regard. Therefore, we continue to
promote and work intensively on the further integration of payment systems and instruments.
With this successfully achieved, the operating environment of SMEs can be greatly
enhanced to the overall benefit of the economy. Because, as you know, when SMEs prosper,
the economy prospers.
Thank you very much for your attention.