In this week's blog, we are delving into the House of Commons Treasury Committee report on the state of UK SME finance. Despite being published on May 1st, a date that may have slipped under the media radar, this report is of significant importance. In a world saturated with news, focusing on key reports like this one is crucial. While the report's findings are primarily negative, it's our role as problem-solvers in the industry to understand these issues and challenges. This understanding guides our thinking and decision-making in terms of product. So, with this diagnostic approach in mind, let's dive into the report.
So, what facts can we glean from the report's overarching theme, and how does that intertwine with some of the themes that drive our industry? The main takeaway is confidence, concerning the fact that confidence in small and medium-sized enterprises has fallen significantly, as has their ability to access finance. One of the core debate topics in the report is de-banking, with 140,000 SME businesses having their business accounts closed in 2023. Now, in a sector that finds an opportunity to provide liquidity for small businesses where mainstream banking hasn't been able to provide service, we understand the concept of business goes where money flows. To unpack that statement further with an analogy, if you want to find the most efficient way down a slope, pour water down it, and watch where the water goes. The same can be said in business; the money often flows to the areas of the highest return as a natural phenomenon of economics rather than some sort of measured decision to exclude sectors. This phenomenon is happening as banks restructure their offerings away from smaller businesses, and it also mirrors the entire premise for the disintermediation thesis behind P2P lending; it all stems from this, a sector stepping in to deal with the pockets of drought to extend the metaphor further.
As the report points out, SMEs make up 99% of the UK business population. In our specific sector, they include the vast majority of businesses behind a group of monolithic companies we previously dubbed the "super eight." Addressing these particular issues, i.e., access to adequate financial products and services without being penalised for your standing in the market, is essential to creating a properly functioning market. We believe the answers will come from a modular approach to disintermediated lending, technology, and new thinking, and all of those elements are found in our sector.
Another broader topic that's touched on in the report is "finance apathy" within the broader business population. A survey included in the findings from the British Chamber of Commerce found two alarming issues: the fact that businesses are predominately no longer seeking funding as they expect to be declined and the fact that most companies questioned needed to be made aware of options beyond their main banking lines. This narrative needs to be addressed within the alternative lending markets to change the message that alternative lending - doesn't mean lending of last resort; it can just mean lending that fills the gaps created by the diminished appetites of the mainstay institutions. The issue isn't the businesses; it's the market's infrastructure.
The final point of the piece references Basel 3.1, a whole topic in itself, but to very quickly summarise, the Basel Committee standards "cover the amount of capital banks need to hold against the risks they take and are agreed upon at an international level by the Basel Committee on Banking Supervision (BCBS)" In a post-financial crisis world we have all inhabited this last 16 years, the mitigation of risks in banking has been front and centre, but the concern is this kind of oversight will seriously diminish consumer borrowing opportunities via mainstream banking routes, due to the increased capital requirements enforced on said banks. Has the market anticipated these changes with the considerable demand for private credit market investment? Is it less about yield and rate reductions and more about anticipating demand bidding up returns?
Either way, there are two conclusions: damaging the SME sector's ability to access mainstream funding at this point would be incredibly damaging to British business. However, an offshoot of this may be net positive inflows into alternative markets, private credit markets, and the P2P sector.
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