By John Lunn, Partner, transformation consultancy Moorhouse
Alternative sources of finance such as peer-to-peer lending and crowd funding are on the rise, with both corporates and SMEs increasingly accessing these sources of funding. This will undoubtedly continue to grow and has the potential to be a real catalyst for change in the industry. Although traditional lending channels are starting to unclog as corporate risk appetite returns, banks must make sure that they are not left behind in favor of alternative lenders.
Lending flow to businesses has been sluggish as the recent Bank of England’s Quarterly Trends in Lending report shows. The average monthly net lending flow to UK businesses was negative in the three months to November 2014. However, credit availability has improved with banks competing to lend to larger firms or lower-risk companies. Furthermore, these companies are still turning to their banks for loans. Respondents to the Bank of England’s Credit Conditions Survey expect demand for bank lending to increase for all but small businesses in 2015 Q1. Yet, although banks have historically been a crucial player in this sector, companies can increasingly access more varied lending sources.
Since the financial crisis, banks have done little to adapt or innovate and most have simply carried on business as usual. However, regulators have opened up the industry, with up to ten new lenders set to receive licenses to enter the banking market in the next two years. Banks face mounting competition for their customers as smaller lenders can offer specialised and targeted offers. What’s more, new entrants are likely to prevail in this sector as larger, established banks are tied to legacy approaches to managing risk and slow to respond to the needs of the market.
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This can be seen when we look to the digital market and how easily different banks are adapting to mobile payments. Nearly 20 million of the UK’s current account holders are locked out of the PayM system as their banks deal with more pressing priorities. However, newer and more agile banks, like Metro Bank, have easily adapted and can provide the service easily and smoothly.
The Government and the Bank of England recalibrated the flagship Funding for Lending scheme last year to incentivise banks to lend. By providing banks with cheap credit, this scheme encourages lending to SMEs in particular. However, this scheme is not having the desired effect as net lending to all businesses through the scheme was negative at – £2.4 billion in 2014 Q3. As banks continue to be risk averse, continued economic growth will be increasingly dependent on new finance sources for business.
Regulatorsare creating the conditions for true competition and they will play a key role in how peer-to-peer lending and crowd funding sources develop in the market. These lenders must become established players before they can become a core source of funding for organisations and individuals. Yet, regulation is also hampering larger financial service (FS) institutions. Moorhouse’sBarometer on Change research shows that banks and other FS institutions are often hampered by vast and complex regulatory pressures.
While tighter regulation is an important step in freeing the banks from these pressures, this brings its own dangers. If banks are distracted by regulatory pressures or competition, this may take their focus away from the customer. Ultimately, regulation has been put in place to protect the customer. However, banks may lose sight of this if they just focus on achieving compliance. This is an opportunity for them to build a culture that puts the customer at the heart of the business.
In order to make the right changes, banking organisations need to understand their purpose and the needs of their customers. This will make it easier to identify where and how they need to change. By aligning the strategic aims with change initiatives, banks can ensure that they build a change management culture than realises their goals. It’s important that the customer remains central to any and all transformation decisions.
Organisations are adapting to a constant programme of change and it’s no different in the financial services sector. While this industry is likely to evolve and banks will need to adapt to these changes, the fundamentals remain the same. Banks that accept and incorporate change and focus on their customers will succeed, whereas those that fail to do so may not survive.