Transforming Lending in the UK Part 2

This is the second in a series of posts centred around the article ‘How should we fund the UK’s growth agenda?’ posted earlier this month. In the article, the head of the Business Finance Task Force asked for ideas on ways to transform lending and fund UK growth.

I extracted key questions (in quotations) from the article and framed my views around them below.

“Again, who are the potential alternative non-bank providers of finance, and how can we improve the “plumbing” to achieve better connection and more fruitful collaboration between those with investible funds and those who need access to those funds. What regulatory barriers, for example, exist? “

Using technology to speed up and widen information access will undoubtedly enrich connections between borrowers and lenders and can widen the pool of participants. Institutional funds, specialised debt funds, asset lenders, cooperatives, credit unions, family offices, and private investment/lending clubs can all mobilise short term funding to grease the wheels of trade.

Collaboration and interoperability are the key – while technology to connect business, corporates and banks exists, it is often deployed in competing silos. Hence the number of supply chain and invoice networks, P2P lender groups as well as attempts to create invoice marketplaces. Not to mention the large number of non-organised entities seeking to find a home for their cash, some of whom find their way to P2P or crowd-funding, but the majority of whom use intermediaries and advisors to source and sift.

In a previous post, I talked about some challenges that invoice auctions face – and while it may be some time before such auctions see significant activity in the UK, I do think there is a segment of businesses and investors that will benefit from a liquid invoice exchange. A major challenge for the UK will be rules around collateral which make it hard for a business with a loan facility to pledge a specific receivable. In this instance,  the US (which has an invoice auction) collateral environment makes it easier for businesses to finance (sell or discount) specific invoices.

P2P loan networks are also a welcome addition to the commercial financing alternatives available to SMBs , and hopefully self-policing, industry standards and procedures will stave off compliance-based regulatory scrutiny and avoid knee-jerk over-regulation.

A balance needs to be struck between encouraging SMB sector growth and protective measures needed to safeguard individual lenders categorized as ‘unsophisticated’ or ‘unaccredited’ (i.e. as with investors). P2P loans, in my view, will still only address a segment of the borrower base and are only part of the solution.

A critical issue for all sizes of lender is the lack of publicly available information held on SMBs. Forcing businesses to make additional disclosure is not, in my opinion, the way forward.

Giving them good incentives and immediate rewards to do so, will result in a larger number of businesses willingly sharing more information.

Credit agencies try to do what they can, but businesses don’t reveal a great deal, nor have much incentive to do so. It could be that business owners feel that credit agencies already hold too much information about them personally, or it simply that agencies charge for business data, but businesses don’t presently have a good enough reason to divulge too much.

Collaborative technology that increases visibility between lenders and businesses, and encourages a higher level of information exchange is an important step towards better commercial finance distribution. Here, I don’t think forcing the SMB through regulation is the answer. Instead, making information a key to unlocking the lending chest may be the answer.

Once connected to borrowers, lenders need to be able to filter and process data efficiently, assess risk quickly and make informed but prompt decisions. The current way of doing things is still manual and relatively labour-intensive. Lenders (including banks) still have resource constraints in terms of identifying the companies that best fit their risk appetite, assessing creditworthiness and finalising documentation.

Corporate banking and retail banking technology have driven huge leaps in simplicity and turnaround time, dramatically dropping bank processing costs. In the US, some retail lenders process the entire deal (including signing) online. While there is a drive towards relationships and brick and mortar banking, this is only financially viable with underlying technological cost gains (and richer customer relationship data).

Business (bank and non-bank) lending needs updating: the solutions need to be designed to solve pain points on all sides, be accessible by everyone via the web regardless of legacy systems, and not require jumping through hoops to activate. Easy, affordable, and not scary.