Retail banks in the UK are now on the clock. They now have two years to boost their technology platforms so that finance is responsive and transparent for its customers.
Banks are also required to provide information that will make it easier for customers to switch bank accounts for a better deal, as well as set ceilings on charges for going into their overdrafts.
The Competition and Markets Authority (CMA)’s new report outlines a series of measures to boost competition and level the finance playing field for smaller lenders.
“We are breaking down the barriers which have made it too easy for established banks to hold on to their customers. Our reforms will increase innovation and competition in a sector whose performance is crucial for the UK economy,” Alasdair Smith, chair of the retail banking investigation at the CMA commented.
A single app to manage loans and cash flow
As a priority, the CMA has outlined a requirement for banks to implement Open Banking by early 2018. This technology platform will offer personal customers and small businesses to share their data securely with other banks and with third parties.
SMEs can essentially manage their accounts with multiple providers through a single digital ‘app’, to avoid overdraft charges and manage cash flow, as well as to compare products on the basis of their own requirements.
Understandably, challenger banks and alternative finance providers are unanimously jubilant at the prospect of competing with the high street heavyweights in cornering the SME finance market.
As far as the recent interest rate cuts from the Bank of England goes, banks have ‘no excuse’ not to pass on rate cuts, which can only help SMEs borrow at the most competitive rates available, according to Nic Beishon, head of commercial, Equifax UK and Ireland.
“These tools will bypass time-consuming paperwork and make it much easier for SMEs to find out if they’re eligible for loan. By speeding up the decision making process, and providing an early indication of interest rates, SMEs will be much more likely to shop around for the best deals,’ Beishon explained.
While only four banks are obliged to introduce the tools at this stage, Beishon believes that other lenders, including challenger banks, should introduce the same tools to ensure their offering stacks up against larger players.
Is the market already too saturated?
“I always say that by the time you finish a phone call, a new P2P lender will launch in the market,” Chirag Shah, Nucleus Commercial Finance’s founding partner told GrowthBusiness.
According to Shah, the space is simply not big enough for over 300 lenders. “Most of them are tailored to get the money out, but a few are equipped to get their money back,” he explained.
Citing Funding Knight and Legion Trade Finance’s crash and burn, Shah explained that cash flow management and calculated risk-taking are crucial for finance providers that are essentially SMEs.
“Personally, I think the reason for (their failure) is that they weren’t getting enough deal volume and had a big cost base. Its difficult to sustain a business like that. They were chasing deals and when you don’t get the right deals, the bigger the losses. In our line, we see a lot of people chasing deals,” Shah added.
The CMA may spur on competition and innovation with its new measures to make retail banking more equitable, but in the alternative finance space, the lending market competition is generally strong.
“Momentum of being first in the space, that brand recognition, is important. It’s the same reason why Lloyds is doing better than many traders. They’ve been doing it for hundreds of years, and are on TV, on buses and the tube. The (high street banks) will be the first names that come up. If SMEs get rejected by bigger lenders, they will go to smaller lenders. A chunk of them will be the rejects of bigger lenders, and will trickle down to the smallest players. This is why due diligence is so important,” Shah said.
According to Shah, a quick “no” is appreciated as much as giving SMEs facility, and lenders shouldn’t shy away from being firm when required.
“Banks may say ‘no’ for various reasons. (Alternative lenders) are more flexible, but we still need to run the basic checks. A ‘no’ could be related to security, the people related to the business, or its track record and history.
“Recently, we were approached by an entrepreneur looking for funding for his seventh business. His past six businesses failed and all of his previous lenders had lost money. We understand that some businesses fail, but if we are to offer facility for a business like that, they can’t borrow money the way they want. For example, would he give a charge on his house (as collateral)? He said no. If he can’t back himself, how can we?”
According to Shah, it’s very difficult to know which alternative lenders have actually made it. “Everyone has only given one statistic on the money they’ve put out. It’ll be really interesting to see how much money comes back in in the next few years. Ultimately, it’s a mixture of proper risk and a bit of luck.”