Banking
Why digital banks are best placed to solve the SME lending gap
Global Banking & Finance Review®
Company
By Rich Wagner,CEO of CashPlus Bank
Earlier this month, the British Business Bank (BBB) released its annual ‘Small Business Finance Markets’ report. It’s a comprehensive overview on the current state of play in the lending market and provides interesting insight into the changing dynamics of the types of lending and who is the provider.
Over the past ten years, as we’ve seen more competition enter the market Alongside better products and new technology, we’ve begun to finally see the major high street banks lose out to challengers and alternative finance providers. Clearly, the challenges of Coronavirus and the way the Government backed Covid loans were rolled out have had implications for the market as a whole. However, as things begin to hopefully return to normal, it is worth reflecting on why I think we will begin to see a return to the trends seen before the pandemic.
Access to finance has always been a barrier to many entrepreneurs and microbusinesses.
For example, in the SME credit space. If you’re a sole trader, freelancer or start-up business, not only will you find the process of opening a high street business current account bureaucratic and painful, but you’ll also struggle to get a small loan, even if it’s just £500 for a laptop. That’s because, as a new business you don’t have a credit history, and big banks don’t want the expense of getting you started. Even if you have millions of pounds of funding sitting in the bank, high street banks still decline business credit card applications all the time, with around 65 per cent of new businesses refused credit.
The strength and innovation of our world leading fintech sector, and credit where credit’s due, the increased pace of licencing and introduction of pro-competition measures from UK regulators, has started to eat into the revenue streams available to big banks. A recent update from the FCA on banking competition highlighted how low interest rates have put pressure on profitability and big banks are saddled with legacy costs and that pricey (if dwindling) branch network. So, if you’re a small business that’s not eligible for a chunky fixed term loan that might actually be an attractive proposition for a high street bank, forget it.
We’re hopeful that as the economy begins to emerge from the pandemic that companies can begin to look towards growth rather than survival. Small businesses provide the overwhelming amount of private sector jobs and we need to look after them if the economy is to bounce back and meet wider challenges such as levelling up. In my opinion, and what I think we will see in next year’s BBB report, is a return to the new normal, which is the growth of challenger banks who can service and provide the products and finance that SMEs really need.
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