A Future of Finance webinar with SME banks, regulators, academics and challengers to the status quo.
The banking industry in the United Kingdom is so consolidated that it is not surprising the Treasury and the Bank of England identified competition as the most urgent need in the wake of the great financial crisis of 2007-08.
Metrobank has had a banking licence for more than decade now. Monzo (2015) and Starling Bank (2017) are the best recognised followers and fellow banking unicorn Revolut (2015) finally applied for a banking licence in January 2021.
If the multifarious payments and other apps fostered by the Open Banking initiative launched in January 2018 are added – there are over 300 of them – the United Kingdom retail banking market looks highly competitive.
In reality, it is not. The Big Four banks (Barclays, HSBC, Lloyd’s and RBS) still own 75 per cent of current accounts. The same is even more true of small and medium-sized businesses (SMEs). The Big Four own 85 per cent of business accounts.
An Open Banking Initiative survey of 500 SMEs, published in December 2020, found half were using open banking providers, but only because the Pandemic necessitated on-line banking service. Less than one in five (17 per cent) even of these SMEs had also switched their bank account.
As to borrowing, the SMEs in the survey made it clear that the government was a better creditor, not just than the banks but the challenger banks too.
Since one of the purposes of the Open Banking initiative is to use data sharing to break the Big Bank preference for lending against collateral rather than future cash flows – precisely because it imparts a persistent institutional bias against capital investment, exacerbated by an increasingly asset-light, largely intangible digital economy – this is a major defeat for innovation in banking in the United Kingdom.
The Bank of England has identified a funding gap of £22 billion for the 5.94 million SMEs in the United Kingdom, which currently obtain 84 per cent of their debt from banks. Few are able to shop around. In fact, one reason SMEs do not change their bank is that their chances of being rejected for a loan by a new provider are 50 per cent higher.
When conditions deteriorate, SMEs then face not only a reduced supply but higher interest rates, shorter maturities and demands for increased collateral. In 2008-09 the major banks effectively withdrew from lending to SMEs altogether, and SMEs had no serious alternative source of finance.
It is now clear that only a new type of bank, which is prepared to do the difficult and intricate work of making informed judgments about the long-term creditworthiness of SMEs, can end this systematic bias. In other words, what SME banking in the United Kingdom needs is not more feeble competition of the kind provided by the challenger banks and Open Banking apps but more diversity.
Unlike Germany (which has more than 400 full-service Sparkassen savings banks and more than 1,100 full-service cooperative Volksbanks) or the United States (which has 5,700 full-service community banks and more than 5,600 credit unions with assets of more than £1 trillion), the United Kingdom is dominated by publicly listed banks.
The few remaining building societies stick to residential mortgage lending and the credit unions are so fragmented (there is 470 of them) and minuscule (total assets are £3.1 billion) that they make scarcely any impact on the economy at all.
The first signs of structural change have now appeared, in the shape of new banks that believe they can lend with confidence to SMEs on the basis of tacit (and often local or regional) knowledge as well as the increasing volumes of hard data available in a rapidly digitising economy.
In theory, new banks with a good understanding of how to lend to SMEs will not only increase the supply of credit to SMEs, but increase the resilience of the banking system as a whole by broadening the size and type of bank, and make the structure of banking less pro-cyclical.
This Future of Finance webinar will explore with the leaders of some of the new banks, and with experts from countries with more diverse banking systems, whether it is not technology and data alone, but local and regional knowledge and relationship banking, that can build a more resilient, responsive, stable and innovative banking system for SMEs.
1. Bank of England, Open data for SME finance: What we proposed and what we have learnt, March 2020.
Topics of discussion will include:
1. Are SMEs victims of financial exclusion?
2. How much should we care about the limited access of SMEs to credit, when the vast majority contribute little in terms of employment, output, productivity and innovation?
3. Are there regional differences in SME need for and access to credit?
4. What evidence is available that traditional banks are using open data and data analytics to inform their credit judgments about SMEs?
5. The Bank of England has proposed an Open Data Platform, through which SMEs could share data with potential lenders for on-boarding processes and credit decisions via APIs. How helpful is data in terms of increasing the supply of credit to SMEs and attracting new entrants?
6. Would API standards help facilitate data sharing by SMEs?
7. How helpful would digital identities (Digital IDs) be to SMEs seeking credit?
8. What advantages do new ownership structures offer and what barriers do they face (e.g. funding, law, regulation)?
9. What lessons can the United Kingdom learn from other countries?
10. At what size do economies of scale cease to matter in banking?
11. Should regional capital markets be redeveloped as a source of funding for banks and SMEs (e.g. through tokenisation)?
12. What can new models of banking do for consumers as opposed to SMEs?
Rod Ashley CEO at Alba Bank https://www.linkedin.com/in/rod-ashley-194399/
Tony Greenham Executive Director at South West Mutual https://www.linkedin.com/in/tonygreenham/
Dr Ken Bishop is Director for the Northern Ireland Assembly All-Party Group on Fair Banking & Finance https://www.linkedin.com/in/kenbishop1/
Professor Charles Munn, Ethics Committee Chairman at International Association for Sustainable Economy https://www.linkedin.com/in/charles-munn-a9a43616/
Katrin Herrling CEO and Co-Founder, Funding Xchange https://www.linkedin.com/in/katrin-herrling-312197…
Moderated by Dominic Hobson Co-Founder at Future of Finance https://www.linkedin.com/in/dominic-hobson-49b8222…
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