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SME lending. It’s more famine than feast but is there now a remedy?

Whether it’s in the media, London buses or in the newspapers, we are being inundated by high profile, corporate advertising from alternative finance providers promoting their easy SME lending experience. This is a very interesting development, because until now there has been a distinct lack of focus by the traditional lenders on this poorly served, but critically important business group. A group (should anyone need reminding) whose significant contribution to the global economy is vastly underestimated.

Historically, financial institutions have avoided lending to SMEs due to high cost of delivery and loan servicing, the limitations imposed by legacy technology infrastructures and outdated processes. For too long, SMEs have been left out in the cold looking longingly at the overflowing funding table the large corporates have been dining at for years. But now, it appears the ‘Remedy’ for this lack of focus is the recent initial award (Pool A) of £280m from the Banking Competition Remedy (BCR) funds to banks Metro, Starling and ClearBank. The UK Government has mandated that these funds must be spent to give underserved SMEs the opportunity to join the feast.  Metro is topping this up by investing £2 of their own funds for every £1 from the Remedy fund.

The BCR or ‘Remedy’ funds was announced by the government following the 2008 financial crisis. Fund allocation is segmented into three categories; capability, innovation and current account switching incentives. Now that the initial Pool A funds have been allocated, the important question is, what does this really mean for the awarded banks Metro, Starling, ClearBank and their customers, the UK SMEs?

For starters, it’s worth noting what the Remedy funds cannot be used for. This includes, subsidising pricing, general marketing activities or equity or tier one capital. Now let’s explore the exciting possibilities the fund represents and what the recent decision to award Metro, Starling and ClearBank £280m (the total figure will be higher given commitments from all banks to top-up with their own funds) will bring to the business banking ecosystem.

Innovation is one of the stated pillars of the Remedy fund’s objectives and is an area that has until been lacking in the SME space. Even today, if one scratches below the surface of many financial firms, other than within a handful of forward-thinking businesses, legacy systems and laborious, error prone manual processes still prevail. To really make a difference innovation, driven by wholesale technology transformation programmes, should be the cornerstone of ‘must do’ initiatives for recipients of the Remedy funds.

These funds represent a once in a lifetime chance for SME lenders and could be a game changer for the SMEs underserved in terms of digital innovation and customer experience when compared to consumer and corporate financing. If used wisely, they will enable the lenders to take a hard, objective look at the way they conduct the business of lending and to redefine what they truly need from the technology and processes that underpin their market proposition.

The Remedy funds should result in improved services across traditional lending providers. For the SMEs, they will have much needed choice and the opportunity to access loans faster and at potentially better rates than previously possible. The customer experience will be hugely improved allowing for instance, the convenience of accessing finance over the weekend. Afterall, when a business needs finance, directors do not want to be kept waiting nor do they want to be put through laborious application processes, especially ones that involve form filling. They want the ‘Deliveroo or Uber’ experience. Entirely digital, fast, slick and easy.

The global economy relies heavily upon SMEs and the ‘Remedy’ which will enable them to survive and prosper is now being allocated. Time marches on and whilst it’s not all about the money, the swift and appropriate use of the Remedy funds is essential. Speed is of the essence as competition is now rife for banks to become leaders in digital transformation of their SME banking operations. Important decisions by those who control this process must be made and decisive action taken. Food for thought? I hope so.




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