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UK bank competition under scrutiny as fintech firm exits COVID-19 loan scheme

When Tide Platform Ltd., a financial technology company serving small businesses, suddenly pulled out of a U.K. government loan scheme for coronavirus-hit companies in early July, CEO Oliver Prill decried the funding challenges faced by smaller lenders that want to participate in the government program.

The Bounce Back Loans Scheme, or BBLS, launched in May, aims to assist smaller 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, such as Tide, have to source the funding themselves.

Critics of the BBLS and its predecessor, the Coronavirus Business Interruption Loans Scheme, or CBILS, say the funding aspect of the programs is a design flaw, one favoring large, incumbent banks that have big balance sheets plus access to cheap funds from the Bank of England under the Term Funding Scheme.

British Business Bank PLC, which administers the CBILS and BBLS, moved quickly to accredit fintechs as lenders under the two schemes. But concerns have grown that funding challenges will prevent fintechs and smaller alternative lenders participating fully in distributing the emergency loans, entrenching a lack of competition in small and medium-sized enterprise lending.

Tide hits funding drought

At the time Tide withdrew from the scheme, some 70,000 applicants were on its waiting list for BBLS loans, a spokesperson for the fintech said in an interview. Tide had provided £50 million of BBLS loans before pulling out of the scheme, according to the company.

"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 July 7. "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."

When asked why Tide received approval to participate in the BBLS even though it might struggle to source sufficient funds, a spokesperson for British Business Bank said the fintech satisfied all the accreditation requirements and would be welcome to rejoin the BBLS.

Simon Cureton, CEO of Funding Options, an SME finance platform, sees Tide's predicament as part of a bigger problem in U.K. banking.

"Their struggles show quite clearly that there is not a level playing field in the U.K. when it comes to SME finance," he said in an interview. "This is a clear example of what is broken."

Uneven playing field

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The government has "unintentionally" given a competitive advantage to big banks under both schemes because of the funding requirement, Cureton said.

"I'm concerned that irreparable damage has been done to the competitiveness of SME banking," he said, adding that it is bad news for small as well as large lenders.

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, according to Cureton. But they could now come under pressure from regulators to do more SME lending than they would like if smaller lenders are squeezed out of the market, he said.

Charlotte Crosswell, CEO of Innovate Finance, a fintech industry body, said in an email that the lack of access to central bank funding was a problem and that policymakers need to pay more attention to the "pivotal" role that alternative lenders could have in getting SMEs back on their feet as lockdown eases.

Large banks account for the bulk of SME lending, responsible for some £97 billion of outstanding loans to the group, according to a Bank of England report from March. In comparison, £63 billion of lending comes from smaller banks, £28 billion of nonbank asset finance and just £3 billion from peer-to-peer lenders.

Louise Beaumont, executive chair of Signoi, an artificial intelligence-based analytics firm, and chair of the smart data working group at industry body techUK, also believes big banks have a "killer advantage" over smaller banks when participating in emergency coronavirus loan schemes.

While more than 100 lenders, many of them fintechs, are accredited participants in the CBILS and the BBLS, it is unclear how many are "in name only" because they lack access to the Bank of England's cheap funding to actually lend, she said in an email.

When the CBILS was announced in March, British Business Bank had accredited just 40 lenders, mostly big-name banks such as Royal Bank of Scotland Group PLC, HSBC Holdings PLC and Lloyds Banking Group PLC. But within a month, challenger banks and digital lenders, including OakNorth Bank PLC and Starling Bank Ltd., were added.

Painful experience

But for desperate small-business owners, competition, or a lack of it, has never been the real problem as far as lending was concerned, according to Rachel Flowers, a spokesperson for ExcludedUK, a new nongovernment organization campaigning for the rights of those who have fallen through the cracks of the U.K.'s emergency financial support schemes.

"Thousands" of people are still waiting in vain for BBLS loans, and have had frustrating experiences with big banks and smaller fintechs alike, Flowers said.

"Within our community, the stories around BBLS are shameful and heartbreaking. People have been held in queues for weeks on end, they have been credit scored and declined, they have been unable to even open an account at a participating bank in order to make an application," she said in an email.

"So in this instance, no, it was not the lack of competition that was the issue."