The SME Disconnect: A Critical Analysis of the Bank-Vendor Model and a Framework for Direct-to-Merchant Financial Ecosystems

Abstract

The sector of Small and Medium Enterprises (SMEs) continues to be the key to the economic development of Nigeria, yet it has a chronic lack of access to formal credit despite the unremitting demand. This gap has not been bridged by the existing bank-vendor model of SME finance where banks are dependent on third-party financial technology vendors to provide products and services. Rather, it has generated a structural disconnection: banks are motivated to focus on the product-based sales and less on the holistic solutions to business, whereas the role of a vendor is to disaggregate the operational and financial information, which is essential to proper credit evaluation. The limitations of the bank-vendor framework critically assessed in this paper result in the argument that the traditional banking system has turned into a systemic bottleneck to SME digitalization and financial inclusion. It presents the Direct-to-Merchant (D2M) financial ecosystem model as a paradigm shift - circumventing intermediaries and integrating payments with standard business management systems and converting real-time operational data into proprietary credit-scoring assets. With the Nigerian retail sector as a case study, the paper will show how the D2M model can be used to improve cash flow management, facilitate data-driven lending, and create a scalable baseline of inclusive financial ecosystems. It is concluded that the paradigm shift needs to be made beyond the bank-vendor paradigm in order to unlock SME potential, innovate financially, and ensure sustainable growth in emerging markets.