Big Banks Losing Share - Gary Hall

Why the Big Banks are losing their share of the lending market

The global credit crisis in 2007-8 caused problems for everyone. But lending to smaller and mid-size companies was particularly badly affected. Many banks practically shut up shop completely.

And while major economies eventually shrugged off the legacy of the crisis - even Greece, then in terrible straits, has recently issued a government bond with a negative interest rate! - SME lending never really came back from the dead. The Big Banks perceived the risk of lending to SMEs as being relatively high, and the rewards, in a low interest rate environment, were not. That left SMEs starved of funds for growth.

It's easy to blame SME funding problems simply on the credit crunch and a decade of close to zero interest rates. But in fact, something else is happening, too; the big banks are losing their share of the SME lending market to upstarts such as challenger bank Shawbrook or peer-to-peer lender Funding Circle.

That's in line with the growth in all kinds of alternative finance, from Kickstarter and charity sites like GoFundMe financing individuals to crowdfunded property, lending and even equity.

Let's put some numbers on the growth of alt-finance. The Cambridge Centre for Alternative Finance (CCAF) publishes annual reports looking at the sector. In 2017, the last year for which CCAF has put out full figures, alternative finance in the UK grew over a third to £6.2bn - 68% of which was business funding. And 29% of all loans to SMEs were from alternative lenders.

But you'd be wrong to think it's just a matter of market share. According to Accenture UK commercial banking lead, Stuart Chalmers, digital-first lenders are changing the whole nature of lending. For a start, they've already changed many SMEs' expectation that if they need a loan, their regular bank is the best place to start looking.  An EY report on the future of SME banking confirms that "This is not just about tweaking existing products."  In some areas, for instance, smaller property developments, new fintech entrants have created completely new possibilities that existing banks simply can't copy.

The high street banks can't compete for several reasons. They're handicapped by legacy processes, in many cases with massive, cumbersome software that would be too expensive to change. They also have highly restrictive finance requirements imposed by regulators to protect their depositors. By contrast, challengers focused entirely on business lending and without retail depositors can be much more nimble. According to EY, "continued deployment of legacy processes, coupled with restrictive finance requirements" is frustrating SMEs trying to get finance, and sending them off in the direction of non-traditional sources.

That's one reason the total number SME bank loans approved fell from 324,000 loans in 2013 to 203,000 in 2016, according to EY's figures.

Legacy processes involve long timescales - what challenger bank Oaknorth has characterised as "waiting 20 weeks for a 'no' ". Alt-finance businesses - whether digital-first or more traditional - can help SMEs by reducing "time to cash".

These two big trends, alt-finance taking greater share of the SME market, and a focus on the time the lending process takes, are what gave property financier Gary Hall the confidence to co-found bespoke bridging loan provider Certain Bridge.  He's found throughout his career that in the finance and property world in particular, efficiency and speed are of the essence.

For instance, he says, a property developer who has the chance to buy a site at a bargain price - but only if they can get the deal done quickly - needs a decision within 24 hours. The Applicant is not going to get that from one of the big banks, but Certain Bridge does provide that level of speed.

Some providers would do this through using algorithms, Big Data, or Blockchain. But Certain Bridge does it a different way - by going back to traditional financiers' skills. "Know Your Customer" has become something of a tick box exercise for many financial institutions, but at Certain Bridge, it involves the personal touch. Gary Hall says “We know every single one of our borrowers, they're people we can just ring up off the cuff. Whilst we are above average 'Spreadsheet savvy', we are not just spreadsheet jockeys." That's a level of intimacy that branch bank managers - in the days before cost cuts got rid of most of them - used to deliver.

Borrowers will usually speak to the same executive contact at Certain Bridge, either Gary Hall, his codirector or other senior executives, and that's something that many of them value. Plus, of course, the speed of Certain Bridge's decisions and ultimate delivery.

Gary Hall often hears the complaint that "Lloyds is much cheaper." He never denies it - he's more likely to tell a client, "Go to Lloyds then!" Back comes the answer that a loan from Lloyds might be cheaper, but it will take much longer to go through the application process. And that, of course, is why Certain Bridge’s clients are paying up for their bridge!

Gary Hall - Certain Bridge - 70 Cassidy House, Station Road, Chester, CH1 3DW  United Kingdom