Government failure to spin off Williams and Glynn provides a golden opportunity for new SME lenders, says Growth St CEO Greg Carter
Ten years on from the global financial crisis there remains much unfinished business.
Multiple bank collapses in the UK and the US triggered a worldwide panic followed by a deep recession from which we’re still recovering. Public trust in the sector was at rock bottom and the big banks at the heart of the storm had been deemed “too big to fail.”
We all remember the Lehman Brothers bankruptcy, but behind that high-profile corporate collapse came stagnating growth, austerity, and a changed banking landscape which has affected every one of us.
Small businesses were hit especially hard by the crash. Around 85 per cent of business current accounts and 90 per cent of loans to SMEs in England and Wales are with the largest banks. Prior to the crash, the oligopoly cultivated by traditional lenders had meant that business owners were denied the personalised, intelligent, empathetic service they needed. Now, that is changing.
The government’s failed attempt to spin off Williams and Glyn from the Royal Bank of Scotland resulted in an opportunity to bring about real change in how SMEs are served by finance providers. The newly created Capability and Innovation Fund stands at £425 million, and has been earmarked by the government to promote greater competition in SME business banking.
New banking culture
“Challenger” finance providers have the opportunity to apply for specific amounts of money from this fund. In my view, the successful applicants should be those who have demonstrated their ability to innovate and create new services, products and, most importantly, a new culture. Challenger banks and alternative finance providers – some small businesses themselves just a few years ago – have a first-hand understanding of the sector and what it takes to succeed.
Some of these challenger businesses offer niche services, others full-service banking. What unites us is the desire to serve customers better and a commitment to innovate with new technology and products that rival the traditional banking offering and, in many cases, offer customers something entirely new.
There is collaboration between challengers too. For example, businesses using an overdraft-style product from Growth Street now have a real-time view of their available funds via the mobile-only Starling Bank.
There has never been a better time to be an entrepreneur in the UK thanks to an explosion in innovative financial services that are opening up new forms of capital to small business owners on a scale never seen before.
New financial technology is not only helping make SME banking quicker, smoother and more transparent: it is also helping to connect small businesses with new sources of capital as well as other innovative productivity-enhancing services, from cash flow management tools to payroll software.
These trends are being driven by financial technology, regulatory reform and changing expectations from a customer base accustomed to managing their lives and their businesses on their smartphones.
Bank lending to small businesses was flat last year, while asset finance increased 12 per cent and peer-to-peer lending rose 51 per cent. The traditional banks are trying to play catch-up, but they are somewhat hamstrung by outmoded legacy IT systems. The new generation of digital banks don’t have legacy technology underpinning their systems: they’ve been built from scratch to be open, fast and transparent.
Our recent tie-up with Starling demonstrates the potential of “open banking” in action. A new movement is gathering momentum that stands to offer a better kind of financial experience: one where comparing offers is as easy as a swipe or a click, and where different services can tailor their propositions to each customer based on previously siloed or inaccessible data.
Fuelling change is an absolute priority for us. The once-in-a-lifetime distribution of the RBS state aid alternative remedies package should kick-start even more innovation in business banking. By backing innovative British finance firms and bringing into being a new ecosystem of next-generation services, apps and tools, we can help the small businesses that form the spine of the UK’s economy.
Britain’s business owners deserve to be delighted not frustrated, with their banking and lending service providers. It’s only fair.
Growth Street operates a peer-to-peer marketplace that matches investors’ money with growing businesses