Opinion Alternative Lending

Have fintech lenders been completely sidelined?

We need more imaginative thinking from the Treasury to help support SMEs, writes John Davies, founder and executive chairman of Just Cash Flow PLC and chairman of the Association of Alternative Business Finance.

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Julian Schiemann/Unsplash.

Have FinTech lenders been completely sidelined? This is the question I have been asking myself after reading ‘informed’ weekend reports that the big banks weren’t prepared to play ball with the Treasury and facilitate access to crucial funding from the Bank of England.

While the big banks have access to almost limitless cheap funding through the Bank’s term funding scheme at near 0.1 per cent interest, the majority of FinTechs use the capital markets. 

The idea was to have the big banks acting as middlemen to funnel the term funding scheme cash to FinTechs/alternative lenders.

Apparently, this plan has been rejected by the big banks because of ‘commercial challenges’ and their inability to make it work in terms of profitability. 

I’m not in the least surprised because why would the established banks want to help nimbler, more fleet of foot competitors that are better positioned to employ the new technologies that will drive better informed lending and have higher customer satisfaction scores, i.e. those that are going to eat their lunch.

The Government and Treasury have been quick to introduce a raft of measures (CBILS, BBLS, etc.) that is providing much need finance to help SMEs deal with the COVID crisis. 

However, the reason why I pose the ‘Have FinTech lenders been completely sidelined?‘ question is that despite repeated lobbying from a wide range of trade associations, including the Association of Alternative Business Finance (AABF), the Treasury isn’t minded to provide access to the funding FinTechs urgently need in order to support existing customers and new lending.

Capital markets tend to seize up in a crisis and this presents FinTechs with a short term problem. The Treasury knows this but after weeks of deliberations it appears it isn’t prepared to directly help an industry that is focussed on supporting SMEs - something that post COVID-19 is going to be desperately needed.

There is a tremendous irony here because the UK’s vibrant and diverse alternative lending industry was born out of the 2008 financial crisis as the big banks were either unwilling or unable to lend to SMEs. This accelerated the trend of big banks moving away from serving small businesses. This was evidenced by the disappearance of branch business managers, centralising Business Banking into remote call centres and a focus on hitting lending targets by dealing with larger companies. It is much easier to make one £1m loan than 50 for £20,000.

This isn’t a criticism as the banks have to keep many plates spinning and have shareholders to satisfy. However, I have always believed that the big banks and alternative lenders compliment each other as businesses need different levels of support as they start up, invest and grow.

There has been a lot of Government talk about encouraging challengers to the big banks and one of the key drivers for this has been a desire to see increased competition and choice for both consumers and businesses. 

The old saying goes ‘talk is cheap’ and I cannot understand why the Treasury doesn’t have the foresight to support the very FinTechs that have invested in the technology and expertise to support the S in SME. The very same businesses that are going to be needed to help drive the economic recovery and generate tax revenues in the future.

It may be thinking that the big banks will have a change of heart and strategy and suddenly say "let’s put business managers back in branches, let’s focus on those smaller finance facilities (even though it’s uneconomic for us to do so)".

I wouldn’t hold your breath and there is no need to as there is a different strategy the Treasury could pursue. 

Creative and well thought out proposals have been submitted that can work within the existing Treasury and British Business Bank structures. These absolutely recognise the duty of care both bodies have when dealing with taxpayers’ money.

The following quote from a Treasury spokesman appeared earlier this week in AltFi’scoverage on this topic:

 “Alternative lenders and challengers banks are vital to providing credit to SMEs, which is why we will continue to work with non-bank lenders to support their participation in our loan schemes.”

This could be described by many FinTechs as being a little disingenuous as although it is true some FinTech lenders have been approved no access to funding has been provided.

If it is recognised FinTechs have a ‘vital’ role to play why not facilitate the provision of competitively priced funding so the sector can work in tandem with the big banks providing the support SMEs are going to need as we emerge from this crisis?

SMEs are going to have to deal with a mountain of debt as well as the considerable challenges of adapting to a post-crisis world. Imaginative proposals are being made about massive debt write-offs. Whether this flies or not I don’t know, but this is exactly the type of imaginative thinking that is needed.

There are many challenges ahead and the Treasury has been quick to act in so many areas - why sideline FinTech lenders?

John Davies is the founder and executive chairman of Just Cash Flow PLC, and chairman of the Association of Alternative Business Finance. The views and opinions expressed are not necessarily those of AltFi.

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