I was at a 'parliamentary roundtable' on Tuesday on the perennial topic of small business banking reform. A more official report will be forthcoming, but I thought I'd record a few thoughts in the meantime (on a Chatham House basis).
It still seems to surprise some people that small businesses represent 95% of the UK's 5.4m businesses - 75% of which are sole traders - and that they account for 60% of private employment, most new jobs and about half the UK's turnover. So-called 'Big Business' is just the tip of the iceberg, since only they have the marketing and lobbying resources to be seen above the waves. As a result small businesses have long been a blind spot for the UK government - until very recently - and the impact has gone way beyond poor access to funding. It includes slow payment of invoices, the absence of customer protection when dealing with big business and lack of alternatives to litigation to resolve disputes.
What's changed?
A combination of financial crisis, better technology and access to data has exposed more of the problems surrounding SMEs - and made it possible to start doing something about them. And it's clear that legislators are prepared to act when they are faced with such data. The EU Late Payments Directive aimed to eliminate slow payments. The UK has created the British Business Bank to improve access to finance, as well as a mandatory process for banks to refer declined loan applications to alternative finance providers and improved access to SME credit data to make it easier for new lenders to independently assess SME creditworthiness. The crowdfunding boom has also been encouraged by the UK government, and has produced many new forms of non-bank finance for SMEs, including equity for start-ups, debentures for long term project funding, more flexible invoice trading and peer-to-peer loans for commercial property and working capital. Last week, the FCA launched a discussion paper on broadening its consumer protection regime to include more SMEs.
Yet most of these initiatives are still to fully take effect; and listening to Tuesday's session on the latest issues made it clear there is a long way to go before the financial system allocates the right resources to the invisible majority of the private sector.
A key thread running through most areas of complaint seems to be a lack of transparency - ready access to data. This seems to be both a root cause of a lot of problems as well as the reason so many proposed solutions end up making little impact. But the huge numbers and diversity of SMEs presents the kind of complexity that only data scientists can help us resolve if we are to address the whole iceberg, rather than just the tip. That's surely one job for the newly launched Alan Turing Data Institute, for example, although readers will know of my fear that it seems more aligned with institutions than the poor old sole trader, let alone the consumer. So maybe SMEs need their own 'Chief Data Scientist' to champion their plight?
What's changed?
A combination of financial crisis, better technology and access to data has exposed more of the problems surrounding SMEs - and made it possible to start doing something about them. And it's clear that legislators are prepared to act when they are faced with such data. The EU Late Payments Directive aimed to eliminate slow payments. The UK has created the British Business Bank to improve access to finance, as well as a mandatory process for banks to refer declined loan applications to alternative finance providers and improved access to SME credit data to make it easier for new lenders to independently assess SME creditworthiness. The crowdfunding boom has also been encouraged by the UK government, and has produced many new forms of non-bank finance for SMEs, including equity for start-ups, debentures for long term project funding, more flexible invoice trading and peer-to-peer loans for commercial property and working capital. Last week, the FCA launched a discussion paper on broadening its consumer protection regime to include more SMEs.
Yet most of these initiatives are still to fully take effect; and listening to Tuesday's session on the latest issues made it clear there is a long way to go before the financial system allocates the right resources to the invisible majority of the private sector.
A key thread running through most areas of complaint seems to be a lack of transparency - ready access to data. This seems to be both a root cause of a lot of problems as well as the reason so many proposed solutions end up making little impact. But the huge numbers and diversity of SMEs presents the kind of complexity that only data scientists can help us resolve if we are to address the whole iceberg, rather than just the tip. That's surely one job for the newly launched Alan Turing Data Institute, for example, although readers will know of my fear that it seems more aligned with institutions than the poor old sole trader, let alone the consumer. So maybe SMEs need their own 'Chief Data Scientist' to champion their plight?
The latest specific concerns discussed were as follows:
- despite much regulatory activity, few bank reforms have actually taken effect - and many are being watered down - with the result that the banking picture is worse, if anything, than it was in 2008. Recent fines and scandals reveal little change in culture from that described in the report of the Parliamentary Commission on Banking Standards and most recently in the damning report into the failure of HBOS. In addition, banking is more concentrated (despite a few new entrants); less diverse in terms of ownership structure, competition, regional coverage and financial model; and still only about £200bn or 3% of bank assets are focused on SMEs and GDP producing activities. The trouble is we've known this for some time, but aside from the BBB's activity on access to funding, we still seem unclear on what can be done for SMEs at a regional or local level;
- the recent findings and remedies proposed by the Competition and Markets Authority into business current accounts are widely considered to be weak and unlikely to be effective - try searching the word "data" in the report to see how often there was too little available. The report still feels like the tip of an iceberg rather than a complete picture of the market and its problems;
- austerity imperatives seem to be the main driver for off-loading RBS into private shareholder ownership - the bank pleading to be left to its own devices (not what it suddenly announced to the Chancellor in 2008!) - and trying to kill-off any further discussion of using its systems as a platform for a network of smaller regionally-focused banks (as in Germany);
- bank lobbying has become more powerful - and will become even more so with the merger of their various mouthpieces - we need much more transparency on banks' access to government and the revolving door between the City and Whitehall/Westminster - we should have learned long ago that the interests of large banking groups are not aligned with SMEs (or consumers);
- SMEs lack an effective means of resolving disputes with banks, as the Financial Ombudsman Service has limited jurisdiction; banks refuse to release internal reports related to credit decisions and calling in loans; while the FCA is said to be hiding behind its confidentiality obligations; and banks have too much legal fire power for SMEs to take them on in court - hence moves to take matters into their own hands. The FCA has clearly woken up to this, but it's recent discussion paper shows there's a huge gap to close.
- the financial infrastructure for SMEs appears not to be geographically diverse - it doesn't yet mirror the Chancellor's "Northern Powerhouse" policy, for instance - despite calls for bank transparency on the geographical accessibility, a US-style "Community Reinvestment Act" and clear reporting on lending to SMEs by individual banks (rather than the Bank of England's summary reporting). There's a sense that we should see some kind of financial devolution to match political devolution, albeit one that still enables local finance to leverage national resources and economies of scale. Technology should help here, as we are tending to use the internet and mobile apps quite locally, despite their global potential;
- Some believe that SMEs need to take more responsibility for actively managing their finances, including seeking out alternatives and switching; while others believe that financial welfare should be like a utility - somehow pumped to everyone like water or gas, I assume - indeed regional alternative energy companies were touted as possible platforms for expanding access to regional financial services. My own view is that humans are unlikely to become more financially capable, so financial and other services supplied in complex scenarios need to be made simpler and more accessible - we should be relying less on advertising and more on hard data and personalised apps in such instances.
- Meanwhile, SME are said to lack a genuine, high profile champion whose role it is to ensure that the financial system generally is properly supportive of them. This may seem a little unfair to the Business Bank, various trade bodies and government departments, but it's also hard for any one of these bodies to oversee the whole fragmented picture. As I suggested above, however, I wonder whether a 'data champion' could be helpful to the various stakeholder in identifying and resolving problems, rather than a single being expected to act as a small business finance tsar.
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