SME lending is not a "sweet spot" for large banks and many would have liked to shift their attention away from this segment to higher-value lines of business, so fintechs are doing their part in the new financial crisis scenario.
According to a Bank of England report in March, large banks still account for the bulk of SME lending (£97 billion) followed by smaller banks (including challengers and neobanks) that provided £63 billion. Other financial sources like non-bank asset finance and peer-to-peer lending accounted for £28 billion and £3 billion respectively.
In the UK, the majority of lending to SMEs since the outbreak of coronavirus has been through the government’s emergency schemes.
In May, the UK’s government launched The Bounce Back Loans Scheme, or BBLS, to assist small businesses struggling to stay afloat during the pandemic by providing access to loans of up to £50,000. The government provides a full guarantee on the loans. However, individual lenders have to source the funding themselves.
The scheme came under criticism after SME challenger Tide pulled out of the scheme last week. Tide initially slowed and then paused its BBLS loans in June and after reaching around £50m in lending, it had to pull out from the scheme for lack of funding.
In a letter to its 150,000 SME customers, Tide CEO Oliver Prill said the bank would need to raise over £100m in additional funds to fulfil the volume of loans being requested by its customers. At the time Tide withdrew from the scheme, some 70,000 applicants were still on the waiting list for BBLS loans.
"The way the Bounce Back Loan Scheme is set up makes it very easy for banks with large pools of funding available, but not for fintech companies like Tide," Prill said. "Therefore, we're in conversation with our contacts at HM Treasury about the government providing the necessary funding for the scheme directly to lenders, rather than lenders sourcing capital from investors or other financial institutions."
Unlike Tide, other SME challenger banks are still offering SME lending under the scheme in addition to growing during the pandemic.
Starling Bank was one of the few lenders to accept coronavirus loan applications from new accounts. It has approved £903.1m in government-backed loans, and has yet to let go any staff during the crisis.
On top of that, Starling hired 147 people since lockdown began in March, and some 35 of the new employees 35 will be assigned to manage any defaults from coronavirus loans.
Starling’s annual report showed ahta there was no change in its ability to continue to operate for the foreseeable future. The bank has now more than 1.5m registered consumer and business accounts, with more than £3bn in deposits.
However, Starling has yet to see any profit from its loans. Some financial experts said that “lending is hurting” the banks, with predicted losses outweighing the interest they earnt from loans last year.
To illustrate that, Starling recorded £2.1m in interest income from customers but has £2.2m in provisions for bad loans, as reported by Sifted in a recent article.
“We’re doing really well financially, and it’s a horrible thing to say, but the crisis has given us the opportunity to focus on getting new products out… and consolidating our position,” Anna Boden told CityAM. She also added that Starling has plans to expand in Europe and is currently seeking a banking licence in Ireland.
The coronavirus crisis hit small businesses hard, and will take a while for us to see if SME banks will continue to be profitable offering loans.