Big banks have been accused of underserving SMEs. Brian Caplen asks: can the challengers do better?
In the UK the major banks still hold 90% of the SME lending market. They are constantly under fire for both not lending enough and for not serving their customers well. A recurring complaint is that they cut and run when the economy turns down just at the time when businesses most need their support.
The major players are responding to calls from government to do better and Royal Bank of Scotland has set aside £2bn to help SMEs deal with the uncertainty surrounding Brexit. It has also launched a standalone digital bank for SMEs called Mettle and, under the terms of its bailout during the financial crisis, is providing £775m in SME funding to be taken up by challenger banks.
But can the challenger banks do better for SMEs? Are they taking business from the incumbents or opening up new areas of a highly diverse SME market?
In the case of online fintech Iwoca, launched six years ago and offering loans to the smallest of businesses in the UK, Germany and Poland via an automated platform, it is going after mostly new business. Loan size ranges from £1,000 to £250,000 in a market that mainstream banks have largely ignored. These businesses would have either borrowed from friends and family or stood still through lack of cash.
By contrast, three-year old OakNorth is targeting businesses that have EBITDA of more than £2m. OakNorth’s loan size ranges from £0.5 to £40m and its clients often come to them because they are unable to get a bespoke package from the high street banks or will have to wait months to get an answer. Borrowers usually present personally to the credit committee and typically get an answer within an hour. So far, OakNorth has not had so much as a late payment, yet alone a default. All its business could have been done by the incumbent banks but, with the decline of the branch manager, required too much detailed understanding of the risks and rewards for them to bother with.
Overall the challengers are making small dents in the big banks’ overall market share. But the introduction of new business models may provide a competitive shake-up that exceeds the scale of their market share. If so, the outlook for UK SME lending is getting just a bit brighter.
