The U.K. Treasury's emergency lending schemes for small and medium-sized businesses hit by the coronavirus pandemic rely too heavily on big banks and old technology, critics say.
The Coronavirus Business Interruption Loans Scheme, or CBILS, launched March 24 to provide emergency liquidity to businesses. This was followed by the Bounce Back loans scheme in May, which offers loans of £2,000 and £50,000 to tide over the smallest businesses. The two schemes had distributed some £14 billion between them as of mid-May.
CBILS has come under fire for being too slow to process loan applications, leaving desperate businesses unable to access the cash they need to stay afloat.
The government squandered an opportunity to make use of Open Banking to speed up the process, said Louise Beaumont, executive chair of Signoi, an artificial intelligence-based analytics firm, and chair of the smart data working group at industry body techUK.
Open Banking's Application Programming Interfaces allow third parties to extract data, with customer permission, from a bank account. This data insight allows them to suggest products and services, or, crucially in the case of CBILS, to get a quick view of their transaction history in order to make a decision about lending.
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"[Big banks] are not using Open Banking APIs, which they built at great cost ... which would allow them to see the banking transaction history of the applicant in a heartbeat, safely and securely," Beaumont said in an email.
APIs are the technology at the heart of Open Banking and allow different bank accounts and fintechs to "talk" to each other.
"[The Treasury] made the Big Banks the dissemination wing of CBILS, even though Big Banks aren't geared up to get hundreds of thousands of SME loans out to the economy — they are process, people and paper dependent," Beaumont said.
Although the government has supported financial technology companies in the U.K., it has been slow to bring the sector into its SME relief effort, said Nick Ogden, founder of ClearBank, and founder and former CEO of Worldpay.
This is especially surprising given that the Conservative government has done a "phenomenal" job at nurturing the U.K. fintech sector, he said in an interview.
"We've all been beneficiaries of this very proactive strategy. But then they just forgot about us."
A banking oligopoly?
CBILS is administered by the British Business Bank PLC and started out with a pool of 40 incumbent lenders including Lloyds Banking Group PLC, Barclays PLC, HSBC Holdings PLC and Royal Bank of Scotland Group PLC. Alternative lenders and digital banks have gradually been accredited to the scheme, including Starling Bank Ltd. and OakNorth Bank PLC, and most recently SME specialist Tide and alternative lender Liberis Bca Ltd.
Incumbent banks involved in CBILS are favoring existing customers, claiming that they need to be able to see transaction history before granting loans, Beaumont said.
Beaumont described the incumbent banks as being a "cozy oligopoly."
The incumbents involved in CBILS are "making a mockery" of Open Banking, said Simon Cureton, CEO of Funding Options, an alternative lending platform.
"Whilst some of the banks have attempted to streamline the application process for CBILS, it is fair to say Open Banking and innovative technology are not at the heart of the process framework. ... We are seeing the incumbents revert to type in terms of manual processing and proactively turn away customers that don't bank with them already," he said in an email.
Santander, HSBC and RBS did not respond to a request for comment about their use of Open Banking, while Barclays and Lloyds could not be reached.
Fixing the liquidity mismatch
Although smaller, more digitally savvy banks might have far better distribution capabilities, their capital pools are shallower, and this puts them at a disadvantage regarding CBILS, according to Daniel Sawko, managing director of Gwent Limited, an advisory firm that helps startups access funding.
"Capital pools are mismatched to the ability of lenders to deploy efficiently," he said in an interview.
There are some solutions in the private sector, although they are "limited," Sawko said. German-based Deposit Solutions GmbH and the U.K.'s Flagstone Investment Management Ltd., for example, are two fintechs that use Open Banking technology to allow banks with smaller deposit pools to access the deposits of larger banks that have an excess of savings. These two companies could play a role in ending the reliance on big banks in distributing coronavirus loans, Sawko said.
ClearBank's Ogden has a more radical solution, and this is to make Bank of England funds directly available to alternative lenders. These funds would be distributed by a clearing bank, Ogden suggested in a proposal that he put to the Treasury earlier in May. Ogden proposes that his own ClearBank Ltd. takes on the task because — unlike other clearing banks in the U.K. such as HSBC, RBS and Lloyds — ClearBank does not do any lending itself and therefore would not face any conflicts of interest, he said.
ClearBank, launched in 2017, is a "bank for banks," offering core banking infrastructure and access to the main U.K. payment systems for fintechs, smaller banks and other financial institutions to piggyback on.