The banking industry has been the subject of much scrutiny over the past few years, with attention focusing mainly on regulation and governance. However, earlier this year George Osborne confirmed that banks will be legally obliged to offer alternative financing options to rejected business loan applicants, in a bid to encourage greater innovation in finance. Under the new rules businesses will be referred to challenger banks and alternative funders such as crowd-funders, P2P lenders and invoice financiers.
The general reception to this amongst the high street banks was one of trepidation. But should it be? In my opinion the answer is an emphatic NO! As is the case with any new legislation, by taking the initiative you can make it work in your favour. Take for example the impending abolishment of roaming charges across the EU: Mobile network operator Three has shifted this into a major marketing campaign by scrapping roaming charges in some of the most popular countries visited by Britons, including the USA and Australia. The change is coming anyway but they are making it work to sell more contracts.
Now let’s look at the case in hand. As the economy continues to trundle forward, many of SME loan applications are for the purpose of fulfilling a significant order or investing in the expansion of the business. The CMA found that four banks – Lloyds Banking Group, RSB, HSBC and Barclays – currently account for around 80% of loans given to small businesses. Significantly, we also know that that almost half of business loan applications received by the big banks are declined, resulting in a lot of disillusioned and dissatisfied customers. Something no local bank manager wants.
While the bank isn’t to blame – there are certain requirements that must be met in order for a loan to be approved – most entrepreneurs will not see it that way. What the new legislation allows banks to do is offer support and advice to those SMEs that have not been successful in their loan application. In other words, it facilitates better customer service and banks become solution facilitators.
It might surprise you to find that many banks across the country are already doing this. At The Interface Financial Group, we have been working closely with a number of high street bank managers for years, offering an alternative solution, in the form of invoice discounting, for the customers they have had to decline, primarily in the SME market strata.
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Three major benefits to any bank willing to embrace the new legislation include:
Unique Selling Point
The new legislation offers an opportunity for you to create a real point of difference from your competitors, beyond interest rates and savings accounts. By taking action now and positioning your bank as the one that will work with its customers to secure the money they need. Rather than a simple ‘sorry, your application has been denied’ you can now say ‘here are a number of options that we think will work best for your business’. You can create a very marketable proposition to draw in existing and new customers.
More Satisfied Customers
No bank manager likes to be the bearer of bad news but more importantly, no customer likes to be the recipient of bad news. For a small business owner, who is applying for a loan to help grow their business, rejection of their loan application can often be taken as a personal slight. Few things lead to a disengaged customer faster.
By offering your small business customers an alternative you are adding a personal element to your client relationship. You are taking away that big bank element and dealing with them on a personal level. Sitting down with your customer to explain why their loan may have been rejected and suggesting an alternative solution shows that you are actively interested in them and their business. This is the number one way to build trust and brand loyalty – something the banks have struggled with for years.
As I mentioned we have worked with a number of high street banks across the UK over the years. The customers they send to us are generally those that are looking to expand their operations but might not have a long enough credit history to secure a loan. As we’re purchasing their existing invoices we do not need such an extensive history and can generally work with them, provided they have a good debtor base.
Future Loan Applications
The third benefit to banks that embrace the new legislation really stems from the second. By going the extra mile and introducing your customers to an alternative financier, you are laying the foundations for a long and profitable relationship. The client might not have been able to secure a loan with your bank on this occasion but should they need a loan further down the line, when they are more established, it is your bank they will most likely go to as they know you and trust you. We do not see ourselves as ‘long term’ funders. Our clients will be with us through their rapid growth period and then graduate to you as a funding source when the time is appropriate
There’s no doubt that the new legislation gives power back to the customer but it also provides a cost effective route for the high street banks to add real value to their customers’ experience, while establishing profitable relationships with alternative funders. As a bank the only question you should ask yourself is how soon can you start embracing it.
David Banfield is the President of Interface Financial Group, one of the world’s leading invoice financiers, with more than 40 years’ experience in invoice discounting and over 150 franchises across the world. www.interfacefinancial.com