Earlier this month, Business Finance Market (BFM) announced the completion of a new funding round. Founded by Craig Iley, who co-founded Atom Bank and Bank North, it claims to streamline the lending process through technology innovation and a reengineered customer journey to match lenders and SMEs.
Traditional banks frequently complain that new market entrants are subject to lighter regulation and therefore able to spend less on compliance. Iley rejects that charge and suggests that structural regulation actually penalises smaller players.
“You have to divide regulation into two specific areas, the first of which is conduct and customer outcomes,” he says. “Fintechs absolutely should be subject to exactly the same regulation because treating the customer fairly and providing good outcomes makes good business sense.”
“If you look at the other side of regulation - which is what I would call more structural regulation - there is a case to reduce that incrementally because that kind of regulation is focused on the protection of the financial system. It is very hard to argue, for example, that a small bank or fintech would pose the same systemic risk to the banking system as say an HBSC or Citibank.”
While BFM is focused on SMEs, its founder says there is no reason why it could not service larger companies. However, one of the challenges to rolling out the model to corporates is resources.
“Whatever works for SMEs will work for corporates, the only difference being the fact that the large banks allocate much more resources to the latter because their numbers are relatively small,” he says. “The problem with the SME sector is that it falls between two stools – these businesses are not large corporates so they don’t justify large amounts of recourses in terms of people, but they are not to be treated in the same way as retail business.”
In the medium to long term, some consolidation in the digital banking space appears inevitable. However, this does not necessarily mean there will be fewer smaller players according to Iley, who believes the structure of UK banking has crippled competition by allowing four or five universal banks to emerge over the last 50 years – resulting in an uneven playing field in terms of access to capital or capital costs.
“If you provide some protections for smaller players to survive, they will survive,” he adds. “There are good reasons why you would want to do that, because there are so many different segments of the market where you can provide much better customer outcomes if you have smaller banks that are more focused on specific segments.”
To support this point, Iley suggests there is room for another ten providers in the SME lending space alone, which is reckoned to be worth in the region of £200bn in the UK.
“You have got to bear in mind that when a new bank comes to market it is restricted from a regulatory perspective and also from a capital perspective, so the lead time to develop a lending book of £5bn is between six and ten years,” he says. “So if you brought in ten new banks each lending around £5bn, you are still only touching 25% of the market.”
The precise level of consolidation will depend on the political will to intervene in the market and protect smaller players, concludes Iley. “One of the things the government did after the global financial crisis was look to different areas of the world to see which markets performed better than the UK and the standout was Germany, which has a tiered banking system focused on specific sectors and regions.”