Of all the collaborations so far between high-street banks and fintechs few have greater potential significance for the P2P market than Esme Loans, the unsecured small business lending platform launched in February by RBS.
Esme, which has just 12 staff, is still in a roughly six-month pilot phase during which it has been based in the London office of Ezbob, the online direct lender from whom RBS licensed the venture’s technology platform. Richard Kerton, the 30-year RBS veteran who heads Esme, explains that while the operation was getting going, it made sense to share Ezbob’s base on Marylebone Road so that its tech team was on hand to smooth any hiccups. However, the venture is about to move into its own offices, signalling the next stage of its development.
Esme looks like nothing so much as a direct riposte to Funding Circle. It addresses a very similar market – unsecured small business loans, ranging from £5,000 to £150,000, for terms of between one and five years and backed by personal guarantees. Borrowers must be limited companies with two years’ trading history.
Nor is its pricing a million miles from Funding Circle’s – with annualised rates on shorter loans quoted at between 6.84% and 16.2% with the longest loans ranging from 8.52% to 11.04%.
Esme’s pricing is interesting because unsecured loans to small businesses attract a high capital charge for banks – typically 57% – that a P2P lender such as Funding Circle does not have to contend with. This will have some effect on the price that a bank-funded platform can charge, but it appears that Esme is able to offer loans at rates comparable to Funding Circle in spite of the capital charge, possibly due to a lower cost of funds and efficiency gains from operating a fully digital proposition.
“You take into account your capital charge, your potential losses on the book and also the costs, so it’s a fully costed charge that you put out there,” says Kerton. “But you also want to put out interest rates that are competitive against the broader market and the traditional high-street banking market.”
Esme’s launch came at a moment when Funding Circle’s lending was accelerating sharply – since the final quarter of 2016 the P2P platform has been advancing more than £100m a month – and Kerton does not disagree with the suggestion that Funding Circle’s growing momentum signals the market for online unsecured business loans is reaching critical mass. He declines to give figures for Esme’s lending so far but adds: “We’ve been very pleased with the origination we’ve seen come through the platform and the way it’s been received in the market.” Borrowers come from “right across the SME space”, he says, with those turning over between £100,000 and £5m-£10m forming the platform’s sweet spot.
RBS’s aim with Esme is to test a completely digital lending operation that will match existing fintech platforms for speed and ease of use. To achieve this, it broke with a long tradition in mainstream banking and decided to license existing technology rather than build its own platform from scratch.
Kerton argues that banks have recently become much more open to using others’ technology because it allows them to speed up their innovation efforts as the pace of change in the market accelerates.
For Esme’s pilot phase, his team is working with a small group of commercial finance brokers who are originating most of the lending, although Esme also receives applications directly from small businesses through its website. Applications typically take 10 minutes to complete, he says, during which users provide details and link data sources to the platform such as bank statements and HMRC returns, online accounting packages such as Xero or Freeagent (which NatWest has been offering free with new small business accounts), and Amazon and eBay accounts.
The system filters applicants automatically into three groups – accept, decline or refer, the last of which are sent to an underwriter for a final decision. However, thanks to the automated way in which the borrower’s information is gathered, even manual underwriting is more efficient than the conventional bank process, which is “very iterative and backwards and forwards,” says Kerton.
The Esme chief says his team is gathering feedback from customers and brokers to help refine and streamline the application process, and further tweaks to the Ezbob platform are expected, including the ability to link additional data sources “as the world continues to open up into APIs and everyone has an API that allows customers to link different data sources to us”.
Although it is still very early days for Esme, Kerton believes that the type of banking service it aims to offer – digital from end to end, self-service and powered by automated data collection – represents an important part of the future of small business banking.
He argues that banks have always lent unsecured to small businesses, but for loans above £35,000 to £50,000 – the heart of Funding Circle’s market – bank customers have had to endure a lengthy manual process run by a relationship manager. “Where some of the alternative lending platforms have been quite smart in the way they have marketed themselves is to target an area which is slightly fragmented across the banking space, in terms of the journey that people experience.”
Initiatives like Esme suggest that some banks, at least, are no longer happy to see an entrant play in a growing part of the small business lending market relatively unopposed. Kerton is careful not to mention Funding Circle by name, but his analysis of the trends is clear: “Banks are adapting their own models to serve their customers in the way they want to be served. Our customers are saying ‘we want to be able to self-serve and we want more digital experiences’ so the banks are having to change their models to do that.”
