European SMEs Have a Lending Problem. Here’s What Needs to be Done.

Despite years of policy innovation and government support, small-business lending remains somewhat inefficient in Europe, meaning that regional small and medium enterprises (SMEs) – which make up 99% of enterprises in the EU – still face surprising hurdles when accessing credit. 

Since 2018, PSD2-enabled open banking has given banks in Europe standardized access to financial data from customers’ accounts. Given that this policy means that lenders no longer have to rely on outdated credit reports and manual bank statement submissions, lending should be quicker and based on more accurate, up-to-date information. 

However, reliance on manual processes in SME lending remains. A PYMNTS Intelligence Report titled The State of Digital Lending Readiness showed that the lack of automation of SME loans is a global problem, with only one-third of banks surveyed stating that their automation of SME lending matched that of their consumer lending. This reportedly leads to slower loan disbursements. 

In Europe, SMEs are facing a particularly difficult moment. With geo-political situations exacerbating inflation Europe-wide and increasing pressure on the European Central Bank to raise interest rates, SMEs are starting to feel the pinch. Higher global oil prices trigger increased transport, logistics, heating and manufacturing costs. These increases will disproportionately affect SMEs, which tend to operate with tight margins. 

This backdrop of higher operational costs is making the need for European SMEs to secure prompt bank loans more pressing. But European SMEs often have to wait weeks for bank loans — time that they, more often than not, cannot afford. 

Shortening this approval process will require comprehensive modernization: a shift away from manual underwriting processes, the digitization of data collection and automation of compliance. 

The uphill battle entrepreneurs face 

Studies show that delayed financing stalls growth, limits hiring, causes deal losses and pushes European SMEs to seek higher-cost alternatives such as non-bank digital lenders, who tend to charge higher interest rates but approve loans quicker. 

So why the delays? One reason is that European banks’ continued reliance on manual underwriting processes and legacy credit information impedes decision-making, leaving businesses without timely access to capital. 

Slow SME lending is also partially attributable to the fragmented implementation of open banking in the EU; national regulators, rather than a unified EU body, handle the implementation of open banking in each nation. This means that all 27 EU countries have applied their own laws and interpretations to the open banking system. 

For example, SMEs in Italy, Denmark and France have to contend with lower infrastructure maturity for open banking than Poland, the Netherlands and Germany, where the A2A adoption rate is higher. These disparities in infrastructure maturity have tangible consequences; in France, 27% of SMEs struggle to access financing, whereas in the Netherlands and Estonia the proportion is approximately 10-12%. 

Regional variations also exist, with Southern Italian SMEs having to deal with less digitalized banking systems than their northern counterparts. 

European legislation designed to fix the fragmentation problem is in the pipeline. Both the EU’s proposed Financial Data Access framework (FIDA) and PSD3 legislation aim to harmonize European banking by standardizing API quality and expanding data access. But regulation sets the floor, not the ceiling. 

The PSD2 legislation mandated access without mandating data quality or standardized formats, which resulted in 27 countries implementing 27 interpretations of PSD2. PSD3 and FIDA are designed to address this but are unlikely to be implemented for years. 

Meanwhile, European banks have no regulatory obligation to modernize their internal credit workflows – only to provide data access. The bottleneck therefore isn’t at the data-sharing layer anymore; it’s inside the bank. 

In the U.S., where SMEs constitute 99.9% of all businesses, SME lending appears quicker than in Europe. SBA (U.S. Small Business Association)-backed loans partially guarantee bank-originated lending, enabling faster, more scalable SME credit. 

The SBA promises to cover a portion of the loan – up to 90% – if the loan defaults. This reduces the risk for American banks and means that SBA-backed and fintech programs can deliver funds within hours; the SBA Express Loan, for example, guarantees a decision within 36 hours of a loan application.

Digitization as a driver of positive change

The discrepancy appears to be a digital one. The European Investment Bank offers similarly comprehensive loan default guarantees to the SBA. The EIB guarantees cover up to 80% of potential losses for SME portfolios, reducing risk for individual banks. 

But American banks invest much more heavily in tech, AI adoption and modernization than their European counterparts, which has lessened American lenders’ reliance on manual processes and enabled speedier loan approval. 

A Deloitte case study of a bank in the Benelux countries showed that digitizing credit review, collateral valuation and underwriting processes reduced mortgage approval waiting times from 15 to 20 days to three to five days. 

SME lending would benefit from a similar comprehensive digitization. In practical terms, this would mean automating approval thresholds so that low-risk SME loans can be approved instantly while higher-risk, more complex cases are subject to greater, potentially manual, oversight. 

This would also mean introducing pre-populated forms and real-time eligibility checks, with banks auto-filling applications with pre-available data on SMEs’ bank statements, annual accounts and balance sheets. This information should already be available to banks under PSD2 legislation. 

Such automation, if done properly with the use of encrypted data pipelines, role-based access and audit trails, can be more secure than manual processes which see bank statements circulated as PDFs via e-mail.

Though digitization doesn’t completely remove the risk of data mishandling and security breaches, it shifts that risk into a framework where they can be systematically managed.

AI has also become central to automation, which is why adopting these tools is worth considering. With AI tools, European banks can manage SME portfolio health by gaining access and, crucially, insight into real-time, constantly updating SME cash flows. AI can also help create predictive modeling that determines an SME’s ability to repay a loan, reducing reliance on discretionary approvals and accelerating identification of risky loans. 

Furthermore, modernized and digitized banking facilitates better client engagement. SME clients often abandon loan applications mid-process if they do not hear back from banks quickly, given the need for speedy access to funding. 

Digital tracking, which updates clients about their loan status, could help alleviate this issue. Tracking provides entrepreneurs a better sense of waiting times, thus enabling more informed decision-making around the continuation of an application and eliminating the need for time-consuming manual check-ups.

In a time of rising inflation and tight credit markets, the imperative to modernize SME lending processes is more urgent than ever. Banks that can read an SME’s financial health in real time, not through a once-a-year snapshot, but through continuous analysis of how money actually moves through the business, will lend faster, price risk more accurately and catch deterioration before it becomes default. That’s not just a competitive advantage; it’s the difference between a credit market that serves European SMEs and one that continues to leave them waiting.