The Trends in Lending report released last week by the Bank of England shows that as recently as August banks were still taking more money in from UK businesses than they were lending out. Over the last 12 months net lending to small and medium-sized businesses has been negative at £-0.4 billion.
Banks and businesses are growing apart. This is no longer the story of a deep recession driving the fall in bank lending, this is a trend that goes beyond the economic cycle.
While business banking products have barely changed for 20 years, everything else to do with running a business has, from the way businesses communicate with their customers, to how they manage their accounts. Banks no longer offer products to suit many 21st century businesses.
As a result other innovations have emerged, using technology to offer new and improved products to businesses. So far this year, alternative finance providers have lent over £700m to growing UK businesses, and this figure will likely surpass the £1bn mark by the end of the year. If the alternative finance sector continues to grow at its current rates of around 200% a year, by the end of 2017 these new providers could represent over a third of new lending to UK small and medium sized businesses.
The business lending market is in the early days of radical transformation.
The lending model of banks relies heavily on taking significant security over business assets. Businesses with a credit facility of as little as £100k will see a bank take security over assets worth many millions before offering the loan. In a service based digital economy, many businesses don’t have the tangible assets a bank needs to offer credit. Take a graphic design business, its product is time and people, and its assets are unlikely to extend far beyond a few computers. These kinds of businesses will find it very difficult to access bank finance.
A second major problem with bank finance is speed, or lack of it. When MarketInvoice first launched in 2011 it took us three weeks to approve finance – approximately the same amount of time it takes a bank. Just a few years later we can offer finance in as little as three hours, banks of course are still stuck at the three week mark. A modern business can’t afford to wait weeks on end for finance – especially if there’s a strong chance they will wait weeks only to discover their application has been rejected.
When these major flaws are allied to the unprecedented and sustained public loss of faith in our major banking institutions, it’s not surprising demand for business lending has dropped. Businesses don’t want the products banks have to offer and banks aren’t all that keen on offering them in the first place.
The good news is that the fall in bank lending is quickly being counteracted by the rise of new, non-bank finance providers. These new lending models – from invoice trading to peer-to-peer term loans – use technology to offer quicker, cheaper finance. On top of product specifics, technology can enhance the customer experience, by offering unprecedented transparency, online peer reviews and more. These models are growing rapidly; this year alternative finance providers will supply around £1bn of new finance to UK businesses – around three times the total provided last year.
In much the same way that technology has fundamentally changed other major industries with entrenched market leaders, from music, to travel, to fashion retail, financial services are being turned upside down by new providers harnessing technology to offer improved products.
The financial crisis and ensuing recessions have been a catalyst for change in financial services, but that change was inevitable without the crisis. We are now seeing that despite a return to relative economic prosperity, banks aren’t turning on the taps of lending. The trend towards new models of finance is not a flash in the pan fad that is going to ebb away as the economy kicks back into full speed; alternatives are here to stay.