Beyond banking

The Financial Conduct Authority (FCA) recently caused a stir by announcing that it would not be taking action against former managers of the Royal Bank of Scotland’s Global Restructuring Group.

Ostensibly a turnaround unit for struggling small businesses, the FCA states that RBS customers were subject to “widespread and systematic inappropriate treatment” during the five years to 2013.

With September marking 10 years since the collapse of Lehman Brothers, we have a moment to reflect on what has, and hasn’t, changed in small business banking since the great recession. After the crash, banks, regulators and policy-makers launched a raft of initiatives aimed at arresting the collapse in lending to small firms and restoring trust between businesses and banks.

Some, like the Funding for Lending Scheme, brought limited benefits to small firms. Others, like the launch of the British Business Bank (BBB) in 2014, laid the foundations for long-term success.

By providing loans to fledgling start-ups, co-investing with venture funds and underwriting bank lending to small businesses, the BBB has enabled thousands of firms to raise finance for growth.

The battle to get more small firms accessing finance is still far from won, however. Half of small firms are still “permanent non-borrowers”—they’ve never applied for a loan and are happy to keep things that way.

There are long-standing challenges here. Banks can be reluctant to lend at competitive rates to small firms over, say, real estate. Equally, commercial lending is still not regulated by the FCA. That’s bound to make small firms cautious.

"Increasing numbers of small firms are using banks other than the big four lenders"

Really we need to get firms looking beyond the banks and thinking about different options: equity, peer-to-peer and asset-based finance. Efforts have been made to keep finance flowing to small firms post-crash, but what of the need to improve day-to-day banking services for business owners?

One subject that frequently hits the banking headlines is branch closures.

We know that small firms value in-person support. Many need routine access to bank branches: for cash withdrawal and deposit facilities and advice around new finance.

The rapid pace of closures is concerning. We’ve lost 1,500 branches in the two years to 2017 and are set to lose another 12 every week this year. With this in mind, it was encouraging to hear the head of Lloyds recently commit to maintaining the bank’s current 21 per cent share of the branch market. António Horta-Osório rightly acknowledges that doing so creates a “clear source of competitive advantage.”

More broadly, the UK banking market is still beset by the lack of competition which gave us lenders who are “too big to fail.”

The CMA’s 2016 review of retail banking states that “older and larger banks do not have to compete hard enough for business.” The result is that “many people are paying more than they should” for banking services.

If successfully implemented, the remedies proposed by the CMA should facilitate a more competitive, innovative banking industry. The Open Banking legislation which took effect earlier this year will be critical to making this a reality.

Through Open Banking, small business owners are given power over their data: they can instruct banks to share information that’s held about them with other parties to ensure they’re getting the best deals. The CMA is calling for Open Banking to be implemented as swiftly as possible.

Another intervention set to improve matters is the £775m-worth of funding that RBS has been required to put forward to improve banking competition following its £45bn government bail-out.

The package consists of a £425m Capability & Innovation Fund—which challenger banks will bid for with a view to improving their business offerings—as well as a £350m scheme to incentivise RBS customers to leave the bank for competitors. If spent well, this funding could be a real force for change.

Unfortunately, the initiative has been beset by delays. The government initially promised that bidding for funds would start at the beginning of this year. It’s now admitted that challenger banks won’t see any funding until next year.

Things have changed in the last ten years—small firms are finding new ways to raise finance and increasing numbers are using banks other than the big four lenders. But more work is needed to create a small business banking market fit for the future.

Banks must show they are listening to customers, while reinvesting profits to improve client services. In doing so, they will help pave the way for small business success—as well as their own—and ensure that the mistakes of the past are not repeated.