When confronted with crisis, the impossible and inconceivable can become not just possible but real, and businesses suddenly accelerate change and deliver innovation that shapes the course of the future in the blink of an eye.
Covid-19 is proving to be just this for British business. Of the UK’s 6 million small and medium-sized businesses (SMEs), up to 1 in 5 are forecast to fail. This provides huge impetus to find ways to rapidly deploy government and bank funding and help SMEs stay afloat.
Where are we now?
The government has, predominantly, leveraged the established banks to distribute the £330bn in Coronavirus Business Interruption Loan Scheme (CBILS) funding injected by the Treasury. The size, security and history of these lenders is prima facie reassuring, yet they are frequently constrained by legacy systems, rigid credit assessments, cumbersome processes and bureaucracy which in many cases elongates the time it takes to get funds into the pockets of businesses that need them urgently.
Fintechs and open data paving the way
New lending entrants such as OakNorth, Tide and Iwoca are chomping at the bit to be able to help distribute funds to eligible SMEs at pace and are making it clear that the government scheme isn’t doing enough. Utilising the technology underpinning Open Banking, they are stepping into the breach, providing critical funding and support quickly and effectively, to help SMEs survive and come through this stronger. The difference between them and established banks in their ability to respond and deliver at speed is stark. We believe the Covid-19 crisis will cement the role of new entrants and shape the future of SME banking. A sample are set out below:
Swoop, a start-up that enables more effective cash flow management and speeds up access to funds for SMEs, integrates with accounting software, enabling auto-population of applications, and then matches the SME with appropriate funders. This can secure CBILS funding from one of the current 40 providers, or offer alternate forms of finance where appropriate, potentially helping SMEs access cash quickly in the interim.
A taskforce has been formed by four fintechs to help rapidly deploy funds to SMEs during Covid-19. Trade Ledger (digital lending platform), Wiserfunding (SME credit scoring platform), Nimbla (trade credit insurer) and Northrow (onboarding platform) are working together to provide fast, digital lending offerings more rapidly than CBILs funds can be deployed.
Truelayer, an Open Banking API firm, have opened up their platform to anyone to use for free, where they are actively involved in helping during the coronavirus crisis. For example, lenders could use this to verify financial need or individual identity, or to enable card payments without interchange fees. This helps relieve the pressure on bank call centres and enables business access to a range of funding options, without needing to complete multiple applications across providers.
In a timely announcement, Iwoca are launching their OpenLending platform, enabling banks, fintechs and other partners to provide funding to small businesses quickly and digitally at this crucial time. They currently have 14 integrated partners, including Monese, Funding Options and Funding Xchange, with Xero to join later this year. This offering aims to help SMEs survive the challenges in the coming months and to access the right funding in the long term.
The shape of the future
The SME banking landscape was already changing before Covid-19, with fintechs providing much needed stimulus and competition to the established players. This change has accelerated in the face of the coronavirus crisis and it is now clear that both traditional banks and fintechs have a crucial role to play. There has been a 72% surge in the use of fintech applications in Europe (reported by DeVere) and a huge uptick in online banking applications since the crisis began. With the broader global and economic changes this will drive, the future is clearly and immediately digital – behaviours will never fully revert. However, established banks are playing a societal role and their ongoing strength and presence will remain an economic stabiliser into the future, albeit complemented by the nimbler offerings of new entrants.
A collaborative ecosystem where banks, fintechs and alternate providers each play to their strengths in SME lending is taking shape before our eyes. This ecosystem allows all parties to focus on delivering excellence to customers, rather than competing for exclusivity, and offers benefits for all:
- Traditional banks bring security, reach and a depth of resources, the value of which has been highlighted through the crisis.
- New entrant lenders can support SMEs with almost instant access to funds to meet an immediate need and provide an alternate option for secured and alternate finance (both enduring needs).
- Fintech non-lenders can support banks and digital lenders with efficient access to accounting platform data through single APIs, speedy on-boarding and infrastructure enabling dynamic credit assessment, loan and cash management tooling, and a host of other services.
While lending has been the focal point thus far, we believe this dynamic will be mirrored in other aspects of the SME banking market. Those participants that can break established norms, accelerate partnerships and put in place new ways of serving customers will shape the future SME banking landscape.
The current crisis has fuelled market dynamics that will drive lasting change in the SME banking sector. Now is the time for all participants in this sector—established banks, new entrants and fintechs—to establish their role and influence the move toward a new norm and a bright future.
If you would like to talk to Baringa about how you can best accelerate change and the delivery of your SME banking offering in the current environment, please contact Alex Woodhead or Sarah Beckett.