The initial backlash from the fintech industry to the government-backed loan schemes to help companies damaged by Covid-19 has been tempered in recent weeks as more non-bank lenders have been accredited to two of its key lending schemes, the Coronavirus Business Interruption Loan scheme (CBILS) and the Bounce Back Loan Scheme (BBLS).
The anger- which some fintechs still hold- led to some fintechs putting their heads above the parapet, criticising the British Business Bank (BBB), the government-owned development bank which doles out the loans, for giving Barclays, Lloyds and other traditional banks a competitive advantage over fintechs.
In particular, they argued the BBB gave traditional banks a head start by accrediting them to CBILS ahead of fintechs; shut out fintechs from Band of England (BoE) funding accessed by traditional banks; and failed to utilise cutting edge fintech technology to help SMEs devastated by Covid-19.
If fintechs and traditional banks had been dealt even hands, then SMEs bleeding money because of Covid-19 could have been saved from the scrapheap, they argued.
Fintechs started on the wrong side
Simon Cureton, CEO, Funding Options, said: “On the one side you have got those that have all the benefits and the other side, you have those that don’t have all the benefits.”
“The traditional banks and building societies, Cureton says, have had “all the upsides” by being accredited to CBILS first as well as having access to cheap funding.”
“Then you have got the non-bank lenders. All of them started on the wrong side. None of them had access to CBILS at the outset,” adds Cureton.”
“None of them still have access to any kind of cheap funding facility through the Treasury or the Bank of England (BoE). And that is pretty disappointing from my perspective.”
CBILS-accredited fintech says “well thought out scheme”
This chorus of disapproval can still be heard but has been tempered by fintechs which have now been accredited to the government-backed loan schemes, which say the BBB deserves praise for the generosity and speed of its loan accreditation process amid difficult circumstances.
Josh Levy, CEO of CBILS-approved lender Ultimate Finance, said: “It has been a very well thought out process from start to finish where we have been involved. And it hasn’t taken an extortionate amount of time.
“I wouldn’t have any criticism of the BBB. They have been stretched. They have been thrown four different schemes overnight really and expected to operate them.”
Slow in approving fintechs to CBILS
It rankled some fintechs that non-banks were absent in the first wave of 40 plus CBILS-accredited banks announced by the BBB in March.
Fintech leaders thought this particularly exasperating considering BoE research showing that since 2017 all the net growth in small business lending came from smaller banks or from peer-to-peer lenders and other alternative lenders.
Cureton said the government should have consulted fintechs when they launched CBILS- with lenders able to offer 80 percent government-backed loans of up to £5m for companies with a turnover of less than £45m- as opposed to accrediting just traditional banks.
“What they didn’t do is consult with any other parts of the SME finance sector,” he said.
CBILS is essentially an extension of the BBB’s Enterprise Finance Guarantee (EFG) scheme, which over the last 11 years had funded a total of £3.3bn through traditional banks.
Those EFG scheme accredited banks were given the green light for CBILS first by the BBB-a move which Levy says was understandable.
Levy said: “I guess through no fault of the BBB, they just went with who was already accredited for that scheme. It was easier to start with and hit the ground running.”
Fintechs may have been absent from the wave of CBILS accreditation, but to date Funding Circle, Ebury, Iwoca, Paragon, Starling Bank and Ultimate Finance are amongst several fintechs of the 90 accredited lenders.
On BBLS, 21 lenders have been accredited including Starling Bank, Tide and Paragon.
Funding access an issue for fintechs
A further point of contention, say fintechs, has been they have been hitherto shut out of cheap funding from the BoE, denting their ability to compete with traditional banks.
The BoE launched the small and medium-sized enterprise funding scheme (TFSME) in March, to incentivise banks to provide credit to businesses.
The TFSME allows banks and building societies to access billions of pounds of BoE funds equivalent to five percent of their lending at an interest rate near to the BoE’s 0.25 percent bank rate.
This shutting out of fintechs is particularly worrisome for fintechs, as it comes amid an economic environment in which other lenders have turned the taps off lending to non-bank lenders.
Christoph Rieche, the CEO of CBILS-accredited lender Iwoca, said: “While the largest banks have the necessary access to ‘zero cost’ funding from BoE and deposits, they do not have the systems or capacity to meet demand.
“Fintechs have the systems and track record to deliver at scale but not the same access to the low-cost liquidity schemes made available by the BoE.
“Government needs to go one step further to level the playing field between banks and non-banks so that we can deliver on their commitment to save Britain’s small businesses.”
Tide and Iwoca are among those which signed a letter penned by fintech industry group Innovate Finance to chancellor Rishi Sunak calling for the industry to be given access to cheap funding.
And reports have suggested BoE plans are being drawn up to extend TFSME to include fintechs, which are also facing a further hit on their business models as businesses ask for payment holiday
An example of the funding issue was made clear last week by Tide.
Oliver Prill, the CEO of BBLS-accredited Tide, complained that a lack of funding was “holding us back” from lending as much as it would like under the BBLS, a 100 percent government-backed lending scheme designed to be simpler and speedier than CBILS with loans of up to £50,000 to all businesses.
In a letter to its customers, Prill pointed out “the government doesn’t provide us with money to lend to borrowers”.
Since it began issuing loans through the BBLS on May 19, Tide said it had lent just over £50m through the scheme.
“We’re now in discussions to raise millions of pounds more. We hope to have this funding agreement in place soon and we’ll then be able to offer loans to many more of you,” Prill added.
Software fintechs willing to help
Fintechs which provide specialist banking and IT software have been helping US banks lend to stricken US companies and such companies are keen to provide cutting edge technology to aid stricken UK businesses.
Banking software provider Temenos, for example, launched a platform tailored to speed up loan processing in the UK.
Des Noctor, regional director, UK and Ireland, Temenos, said: “During Covid-19, we’ve seen how UK banks’ ability to cope with increasing demand for fast finance has been dependant on their willingness to move away from legacy IT.”
Fintech software providers may help speed up the loan process, as would, according to some, allowing fintech lenders to stick to their current lending proposition.
Instead, fintechs have complained that lenders have to adhere to CBILS’s lengthy and “clunky’ 37 page Terms and Conditions which has meant it has taken weeks, if not months, for fintechs to get up and running as lenders, despite being accredited.
The upshot is this has meant delayed loans to SMEs, which are crying out for new lenders as some traditional banks are only serving existing customers.
CBILS-accredited fintech case studies
Iwoca became an approved CBILS lender last month, after a considerable wait to get approval.
Rieche said: “It took a few more days post accreditation to get the legal work with our refinancing lenders behind us and we have just started funding the first customers under CBILS.”
Rieche is calling for non-bank lenders to be treated the same as banks by government as well as closer collaboration between banks and non-banks.
“Our message is clear- we want to work in collaboration with the banks so that we can find a way to distribute the vast amounts of requests from businesses to CBILS more broadly, this would reduce pressure on the banks operations and speed up access to much needed finance for businesses,” he added.
Atom Bank is offering secured loans for commercial mortgages, through brokers, under CBILS for existing and new customers, which is point of difference to many CBILS lenders which are not open to new customers.
Atom’s chief customer officer Edward Twiddy said since CBILS approval, Atom had taken on £40m of enquiries in the first three days, a figure which expect might triple in the first week.
Twiddy said: “We have had a lot of interest from businesses out there that are wanting these relatively complicated loans.
“We switched from doing our non-CBILS lending, which had been very active. We were basically turning off that tap, putting on a new product with a whole new process attached to it.”
Twiddy said Atom is trying to “truncate” the lending process, from up to 15 weeks down to three weeks.
Ultimate Finance provides CBILS term loans of £50,001 to £500,00, alongside invoice finance facilities of up to £5m as well as being accredited for asset finance.
Levy said there not been “huge demand” for its term loans and invoice finance facility, but believes it will pick up when the economy starts recovering.
“Suddenly SMEs will realise ‘i can actually go and get a load of money advanced against my debtor book and my invoice balance rather than just relying on the emergency credit,’” Levy said.
He said CBILS-accreditation for asset finance would likely have a quicker impact, as construction and manufacturing businesses “will require equipment to get started and mobilise properly”.
Fintechs are playing an increasing role in the government-aided loan schemes over time. Despite this, criticism remains that more should have done more to ensure fintechs were accreted earlier and granted equal share of the spoils as traditional banks.