Shopping for a Solution: The Importance of Marketplaces in a Crisis

By Simon Cureton, CEO of Funding Options 

Wherever you find people, you find markets. From the smallest settlements to the largest urban areas, marketplaces are intrinsic to the human condition. We seek them out. They satisfy a fundamental human need. The marketplace offers access, education, stability and value for those who participate in them. Marketplaces hold monopoly suppliers to account and challenge them to price competitively, delivering efficient and effective allocation of resources above all else. When marketplaces fail we all lose.

Over the past decade, digital marketplaces have transformed the way people approach purchasing decisions. Whether a birthday present, new car or business loan, we all seek the best deal as quickly as possible. But since the coronavirus outbreak, some of these marketplaces have fared drastically better than others. Whilst the likes of Amazon thrive, lending marketplaces have been weakened by the recent government support schemes.

The government’s decision to expand its Coronavirus Business Interruption Loans Scheme (CBILS) and Bounce Back Loan Scheme (BBLS) to accredit more lenders should be commended. Yet, the failure to make such schemes more broadly accessible to non-bank lenders within the SME lending ecosystem risks applying the brakes to market progress.

A regression to an SME finance market that is effectively controlled and coordinated by the state will impact our ability to effectively allocate financial resources. By and large, the support is going to the incumbents rather than the wider market yet marketplaces will be crucial in order to beat the economic challenges we will face further down the road.

In the aftermath of the last financial crisis, the emergence of alternative lending gave rise to a vast range of solutions for different situations. Now, as we stand on the precipice of another recession, there is a lack of understanding and possibly mistrust about these underappreciated lenders, and it is SMEs and the jobs they create that could suffer as a result.

Taking out the competition

The COVID-19 crisis is more than just a health crisis, it is a human, social and economic crisis. In so many ways, it has disturbed the natural balance and the reverberations in the SME lending market are palpable.

According to Michael Porter’s ‘Five Forces’ model, the state of competition in an industry is dependent on the balance between five contending forces. This framework consists of the threat of new entrants; the bargaining power of suppliers; the bargaining power of buyers; the threat of substitute products or services; and the existing industry rivalry. It is the collective strength of these forces that determines the profit potential and attractiveness of an industry.

Despite the obvious positives for small businesses in the short term, the recent launch of the Government-backed BBLS is a new entrant that has thrown the market into a state of flux. Thus far, the scheme has proved to be as popular as expected and the accredited lenders have been inundated with applications. More than 110,000 businesses applied on the first day of the scheme, NatWest alone received 65,000 applications in the first 48 hours.

However, by nationalising funding up to £50,000 through the BBL scheme, business owners will expect all funding below this amount to have the same specifications across the lending market. Yet, without access to the cheap Bank of England funding afforded to the incumbent banks, the alt-lenders simply cannot compete with 2.5% interest rates and no eligibility checks. Key players in the SME lending market have found it difficult to engage with these government schemes, therefore removing the invaluable element of competition from the markets.

Although it is positive to hear more alternative lenders are being included, even those accredited by the scheme are struggling to define their proposition. They’ve been forced to adapt their business model to its framework, inhibiting their ability to offer true differentiation. A situation has developed where we are trying to fit square pegs into round holes.

The marketplace is in stasis. Buyers are going directly to suppliers and the alternative lenders that have been excluded are now in real danger because they can’t compete with the rates offered by the banks.

We recognise that the British Business Bank continues to accredit new lenders, reaching beyond the high street banks for both CBILS and BBLS. However, these small businesses will have a distinct lack of choice when this substitute product is eventually withdrawn and interest rates rise again.

Beyond BBLS

Unsurprisingly, the BBL scheme has been very popular from the outset. However, it’s important not to be blinded by the short term benefits for British businesses. These products were born in reaction to a crisis but have now anchored themselves into a competitive market, disrupting it in a negative way and leaving many key players sidelined. When we emerge from this pandemic, these products could vanish and threaten to leave a gaping hole in the SME lending landscape.

Eventually UK businesses will be looking to build for the future and they will need cash to do so, but they will be turning to a significantly depleted lending landscape. In this scenario, the high street banks will retain their dominance while alternative lenders and marketplaces will have gone under or been acquired.

During a recent Monetary Policy Committee meeting, there were reports that banks had largely maintained credit supply for existing customers and stripped back lending to sectors worst hit by COVID-19. Non-banks also reported emerging supply constraints which played an important role in specific areas of lending, such as the provision of short-term finance for working capital to SMEs. The conversations in these meetings echo the effect of COVID-19 on both banks and non-banks.

In order to resuscitate and reinvigorate the market, we need a return to a healthy and competitive environment that encourages a range of products which compete against each other, catering to contrasting customer segments and niches with different routes to market.

Without a clear light at the end of the tunnel, the government must ensure its schemes are sustainable for the foreseeable future and are not hurting the lending sector or the wider economy. Purely and simply, that means involving every aspect of the SME lending market and leaning on the knowledge and expertise of the ecosystem.