The rise in fintech and digital banking solutions has resulted in leaps and bounds for the UK’s financial scene. Yet despite their gains and promising capabilities, those on the rise still struggle to escape the sneers from those at the top.
This hope for due respect is held dearly by Simon Cureton, the CEO of the business finance marketplace, Funding Options. In this guest-authored piece for The Fintech Times, Simon details the benefits of new competition, the hold that fintechs currently enjoy over their incumbent neighbours, and why exactly we should retire the term ‘alternative finance’ when the solution is anything but.
Competition and choice are essential ingredients in a healthy free-market economy, one where there is sufficient supply to meet demand and new entrants can challenge incumbents. It was this thesis that led to the birth of the financial technology sector as an alternative to the major institutions that had carved up and jostled for market share between them for centuries.
The rise of fintech heralded an era with a world of possibilities that benefit consumers and businesses alike, either through new products catering to niche demand or else straight-up category challengers. All of this has been under the banner of ‘alternative finance’. In life we often revel in our differences, we get behind the underdog, and we bristle and bridle at the thought of ‘fat cats’ enjoying their largesse at our expense.
But there’s something belittling about the term ‘alternative’ too. And for those in power, there is a long history of using that lofty position to maintain the status quo to keep ‘lesser’ mortals in their place.
We are finally asking questions that may see those born with fewer privileges realise their aspirations in a more equitable society. And while it would be inappropriate to equate the importance of such movements with the evolution of fintech, it is time to look at how the constant use of a diminutive term may be holding the sector back.
Pride in the Alt-FI Community
Let’s take the pandemic, which brought so many things into sharp focus. Following the announcement of the Coronavirus Business Interruption Loan Scheme (CBILS) last March, it wasn’t until mid-April that Funding Circle was accredited to join the incumbent banks. Iwoca was finally accredited more than a month later, despite being one of the first to apply that March.
It’s a pattern that has recently been repeated following the announcement of the Recovery Loan Scheme, which replaced CBILS and the Bounce Back Loan Scheme (BBLS). There has been a now-familiar amount of feet dragging, arguably even more so than for the previous schemes. Meanwhile, to target beneficiaries of the schemes- small and mid-sized businesses – have often been left waiting at a time when an influx of cash represented a lifeline.
Funding Circle, despite being held on the grid, raced through the back-markers to deliver close to a quarter of all CBILS loans. In one year, more than £26bn of loan facilities were approved by all participants. It is simply staggering to see a fintech lender, launched in 2010, providing the delivery mechanism alongside banking luminaries NatWest (origins dating back to 1658), Barclays (1690), Lloyds (1765), and HSBC (1836).
Just consider for a moment that back in 2008, Funding Circle was a mere pub chat concept, as co-founders Samir Desai, James Meekings, and Andrew Mullinger first discussed creating a peer-to-peer lending marketplace. The fact it has built the infrastructure and processes to be able to handle such an enormous volume of transactions for the government support schemes is an indication of the direction in which SME finance and financial services, more generally, are going.
Whether a lender has more than 100 years of trading becomes largely irrelevant if it can’t act fast to support its customers. There has perhaps been a perception that fintechs are ‘cowboys’ or ‘going through adolescence’ and therefore not mature enough to be trusted. And the argument would be sound if that trust hadn’t now been earned by the leading lights.
Even younger than Funding Circle, Anne Boden’s Starling Bank has been making significant inroads into the market share of business banking accounts held by SMEs. It expects to own 18% of them within the next five years.
Digital Is Now the Critical Component
The pandemic has accelerated the need and expectation for advanced digital processes. Some of the big banks even turned to fintechs to help them facilitate loans faster and to avoid the approval of more fraudulent applications. The technology now employed to verify that a customer is who they say they are (KYC – Know Your Customer) or prevent money laundering (AML – Anti-money laundering) is plugged into the back-end infrastructure to ensure due diligence is as, if not more, robust than the days of visiting a local branch and sharing physical documents with the manager.
It was this combined with open banking and machine learning that enabled Funding Options to develop a platform whereby real-time loan approvals are possible. Funding Cloud has facilitated a £25,000 loan via iwoca in just 20 seconds – from application to approval. Since then, that has been repeated with one SME applying for and then drawing down on an approved loan in just 39 minutes. To have cash in the bank in that amount of time may be a lifesaver in some instances. At the very least it means an SME owner can spend their valuable time on building a business, not searching around and dealing with paperwork.
Beyond tech, it’s evident that fintechs are now attracting the very best people too. Such has been the sector’s rise from squad member to first team starter, the talent is an exciting combination of true innovators and those steeped in commercial banking expertise. The Funding Options senior team alone has combined commercial banking experience at the likes of RBS/NatWest, Lloyds Bank, Deutsche Bank, Morgan Stanley, Barclays Capital, Commonwealth Bank of Australia, ABN AMRO, HSBC, and Standard Chartered.
Despite all the proof points, progress, and talent, alt-fi lenders so often remain at the margins, unable to access credit via the Bank of England’s Term Funding Scheme, meaning many products have not been able to compete equally with those offered by incumbent banks.
The negative impact of non-bank lenders not having access to an equivalent facility to the Term Funding Scheme, is widely recognised across the sector and more broadly by industry bodies, HM Treasury, and the government. Many have spent countless hours lobbying for change solely to allow the non-bank lenders to be given the opportunity to continue to offer a competitive choice of funding options to UK businesses and yet 15 months after the start of the CBILS, nothing has tangibly changed.
Pushing products down the food chain to the status of ‘alternative’ will only see SMEs missing some of the funding solutions that are most tailored to their needs and priced competitively, to give them the necessary broad spread of options to give them the best chance of success.
Let’s recall the words of Ron Kalifa OBE in the Preface to the Kalifa Review of UK Fintech: “Fintech is not a niche within financial services. Nor is it a sub-sector. It is a permanent, technological revolution that is changing the way we do finance.” The more we put something or someone down in life, the lesser their chances of thriving – and we’d have to ask how serious the government is about wanting the UK to be a world leader. Today we have a global market share of 10% and UK fintech generates £11bn of revenue. But this can quickly change. “Others are waiting for our crown to slip,” Kalifa warned.
While those in the sector draw from a well of pride in being challengers, it’s time for ‘alternative finance’ to take its place in the mainstream. The community is thriving, producing giants such as Revolut and Klarna while the likes of Funding Circle play an integral role in the economic recovery. By promoting greater choice and competitiveness, fintech delivers the service customers have long-deserved and has the power and influence to enable businesses to flourish after months of uncertainty. So let’s just drop the diminutive now.