How the Bank Referral Buzz Began

By AltFi on Wednesday 21 May 2014

Alternative Lending

There’s been a real hubbub of late as to whether government will oblige the banks to refer the businesses they reject for loans to alternative finance providers. It all began with the comments made by Vince Cable – the Secretary of State for Business, Innovation and Skills – at the inaugural AltFi Summit in March.

Below are some of the highlights from Mr. Cable’s address:

  • “I welcome the fact that there is now an alternative business funding portal, which I guess many of you have contributed to. I think seven funding bodies have put this together. It will enable redirection of customers who are turned down from one platform to go to another.”
  • “As I said earlier, the evidence at the moment suggests that about 40% of the people who go for bank finance are turned down and they give up. So anything that redirects people who are turned down by one lender is an advance.”
  • “One key issue is – how do you improve referrals? Is there anything we can or should do to get banks to redirect customers who they’ve turned down, because they either consider their business borrowers too high risk or they don’t like their business proposition? And we’re looking at a variety of options: creating a finance exchange, or perhaps mandating referral – that’s certainly one of the options we have to take.”
  • “We recognize the rather dire position of the UK with funding – particularly for the small/medium company end of the market. We need to do something about it. We’ve now got a major opportunity following the banking crisis. Alternative Finance is already making a significant impact but it’s a very small share of the credit market. We’re trying to do things, both regulatory things and operating through the business bank. We want to do more. One of the reasons I’ve come here is to get feedback from you about how best we can act as a catalyst for this process.”
  • “The issue which I raised at the end of my introductory comments was – how do we encourage/make the banks do referrals? I personally am quite well disposed to the idea of requiring banks to make an onward reference.”
  • “One of the ideas is that you then create a kind of marketplace in which those propositions are put, and an alternative finance provider could latch onto this. It’s not straightforward, but we are working with the treasury on how you might create this pool of rejects.”

Not long after the AltFi Summit, George Osborne launched a consultation into whether the government should legislate such referrals. It’s a move that will have been warmly received by the 250,000 or so SMEs that are rejected for bank funding each year. The consultation period produced an outline of the government’s preferred approach to referrals: forcing banks to refer the details of rejected SMEs to a portal where they can be accessed by alternative finance providers. In response to this, the 7 major platforms behind alternativebusinessfunding.co.uk offered to place the portal under independent management – to guarantee its neutrality. Whether a referral scheme will be enforced remains to be seen.

You can watch the full video of Vince Cable’s address at the AltFi Summit here.

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