ACCORDING to most headlines, Britain’s biggest banks will soon be forced to increase competition in the SME loan market, but a more critical eye might see window dressing in what purports to be radical change.
Of course, it’s great that the government now “gets it”, and wants to throw some tangible support the way of small and medium-sized firms. Employing nearly half of the UK population, they are regarded as essential for continued economic recovery, but have suffered from a lack of adequate finance.
So in comes the Small Business, Enterprise and Employment Bill, legislation, which will be introduced in the autumn.
Chancellor George Osborne confirmed last week that new rules will require banks that reject loan applications from SMEs to then assist those firms in finding alternative sources of funding from the so-called “FinTech” sector. As he was speaking at the launch of Innovate Finance – a new trade body to promote the burgeoning intersection of financial services and technology – this spawned the predictably enthusiastic response his advisers were no doubt hoping for.
SMEs that are turned down will be asked if they want the bank to place their information with an online platform that will match their business with the growing number of peer-to-peer, crowdfunding and other alternative FinTech lenders.
This has some advantages in that firms which choose to push ahead will not have to waste time providing the same financial data over and over again. FinTechs, in turn, will get additional streams of revenue and increased visibility.
But any such expediency could well be wiped out by the fact that this system will leave the alternative providers looking like also-rans.
The UK’s big four banks – Barclays, HSBC, Lloyds and Royal Bank of Scotland – control some 85 per cent of business current accounts and 90 per cent of business loans. They will still get first crack at grabbing the best SME customers, and can comfortably pass on the rest knowing that the new referral system will shield them from the worst of any criticism.
In this scenario, FinTechs are not viable alternatives, but rather are cast as the lenders of last resort.
Payday lending is not the image anyone aspires to for this sector. The Chancellor was very clear on this point at the launch of Innovate Finance, declaring that the UK should become a “world leader” in this emerging field.
“We will ensure a regulatory environment that gives FinTech companies and alternative finance lenders the ability to innovate,” he said before promising an additional £100 million of funding for the sector.
Some of that money will hopefully go towards building up FinTech in its own right, rather than riding on the coat-tails of the established players. Should the sector be made to digest large lumps of sub-prime lending, it will be a feeble force for change.