Exclusive: ‘From alternative to mainstream’ – Simon Cureton, Funding Options and Chirag Shah, Nucleus Commercial Finance in “The Paytech Magazine”
The urgent need to pump cash into small businesses over the past year has given lendtechs driven by open banking a chance to shine… but now they need government to fully embrace their potential, say Funding Options’ CEO Simon Cureton and Nucleus Commercial Finance Founder Chirag Shah.
Turbo-charged change since March 2020, has been a hallmark of the pandemic experience.
The switch from bricks and mortar retail to digital, the growth of homeworking, Zoom calls for schools and GP appointments… the list goes on. And to that we can add another – ‘alternative’ lenders have become defiantly ‘mainstream’, according to Chirag Shah. The founder and chief executive of Nucleus Commercial Finance has overseen the lending of around £180million to SMEs via the UK government-backed Coronavirus Business Interruption Loan Scheme (CBILS) and believes the sector holds itself back by clinging to a now-outdated description.
“We are mainstream. CBILS, if anything, has clearly proven it,” he says. “Businesses shouldn’t be thinking of us as option two, or option three, having gone to the banks first. That mindset has to change, starting with us, the lenders. Providers are doing themselves an injustice by classifying themselves as alternative.”
The CBILS and subsequent Bounce Back Loan Scheme (BBLS) – the former 80-per-cent and the latter 100-per-cent guaranteed, but not capitalised, by the government – brought the fintech sector both opportunity and also problems. A huge stress point early in the pandemic was a failure by mainstream banks administering CBILS to process applications quickly enough for desperate SMEs. When fintech lenders entered the fray that changed, though the schemes’ distortion of the lending market was unhelpful and, in some cases, disastrous for those lenders that could not take part and could not compete.
There was also the issue of liquidity – or lack of it – in the wholesale lending market, which put smaller and non-institutional lenders at a disadvantage. Shah says that, for 18 months before the pandemic, the industry had been working to convince businesses that technology-driven lenders using open banking was the way forward. But scepticism remained.
“CBILS was transformational for us,” he says. “We have processed more than 10,000 CBILS applications, and 98 per cent of our applications have been via open banking. It’s not that open banking changed. What changed was that businesses were willing to try it, to get quicker decisions, and we were able to provide them with a seamless journey – decisioning 86 per cent of the deals the same day. It was the first time many businesses had been exposed to open banking and they realised it was something they could buy into.”
Simon Cureton is chief executive of lending platform Funding Options, which was among those chosen by the government-owned British Business Bank as a designated platform to screen businesses applying for CBILS and present them to a panel of 40 UK lenders. He agrees that the scheme ultimately proved the advantages of open banking. But the gain wasn’t without pain.
Funding Options draws funding from around 120 lenders in total, to service SMEs in both the UK and the Netherlands.
Before COVID-19 hit, open banking partnerships were beginning to take off and lending choices for SMEs were ‘better than ever before’, says Cureton. Then lockdown cut off the market.
“The bottom fell out,” he says. “For the SME finance sector, and every sector across the economy, nobody had a reference point. Every lender had to take stock and some simply stopped lending. More positively, since May we have been quite successful, as a sector, in finding the new norm.
“I wouldn’t say we necessarily have a North Star, because conditions can change, but at Funding Options we’ve put vital new funding into the UK and Dutch economies and we are up at near pre-COVID levels of total lending, which is hugely encouraging.”
By the end of 2020, around 70 per cent of lending issued in the UK through Funding Options was through CBILS. It became the ‘new norm’ for the business lending market, and by the time CBILS and BBLS closed in Spring 2021, at least £73billion had been borrowed through them via accredited banks and lendtechs..
Now a Recovery Loan Scheme kicks in, offering credit from £25,000 to £10million until the end of the year. Like CBILS, it is 80 per cent guaranteed by government. As businesses begin building back, though, Cureton argues more discussion is needed around the market impact of these kinds of state-backed support programmes, specifically whether non-banks should get access to the Term Funding Scheme allowing lenders to borrow from the Bank of England at close to base rate. “It’s important we have government support,” Cureton says. “Currently, we have a two-level playing field, where non-bank lenders can’t access the kind of funding advantage provided by the Term Funding Scheme. The sector has been throttled by lenders with access to credit lines – viable liquidity that allows them to issue government products or their own.
“Despite that, I’ve been incredibly impressed with the fintech sector, given that real disadvantage; that the majority of lenders are still out there innovating, lending, and still bringing vital funding to the UK economy. “Those that are participating in CBILS are right at the front of the pack – the likes of Funding Circle and Iwoca. But I would love to see government fully embrace the sector. We should be pushing the open banking agenda, and the open finance agenda.”
Despite the hundreds of billions of pounds of business support pumped into the economy through the crisis, the need for lending will not end soon, adds Shah. He says: “A lot of businesses have survived because of government support – not just the loans, but also the furlough scheme, support from HMRC, support from creditors and rent holidays. “But the repeat lockdowns mean it will take time for businesses to get up to speed again. Firms that borrowed will have to start making repayments, which will hit pretty much straightaway. If their revenue grows, and the profit margin is good, they’ll be able to meet their expenses.
But for the majority of businesses, revenue will take months, if not years, to get back to pre-COVID levels, with a cost base that is not as flexible. Additional support schemes being planned by the Government will be critical.” If more fintech lenders can take part in such schemes, then the sector will be further bolstered. But one things is certain: the widespread adoption of open banking means there’s no going back to legacy lending processes.
Some parts of the industry probably need to wake up to that. Cureton says: “Given the nature of what we do, as a marketplace or a platform,
if we are to be successful, then without question we absolutely have to be at the forefront of technology and data analytics. So, for us at Funding Options, our key value in the ecosystem is being able to take loan applications at scale from UK businesses, then filter, triage and match them to lender propositions at as close to real time as we can.
“If you are a business that’s looking for a loan valued at £50k or above, any lender out there, to underwrite that application, needs to see your bank transaction information, your credit bureau profile, and, invariably, they would need to have access to management accounts. But the pace to embrace technology varies from one lender to another. Some consume everything digitally and give you an instant decision, while others still take their time. They might take the bank transaction information in PDF format, for instance.
“Without question, COVID has increased the pace of digitisation; businesses are actually embracing open banking. Our adoption rates, straight from the off, were around 25 per cent and that is only going to increase. The same will be the case with open finance. The lenders’ adoption of these new technologies, is going to increase, too. All of these technologies are enablers to deliver the kinds of outcomes SMEs want, which are speed, surety, and a good experience. They don’t want their time being wasted.”
Fortunately, if they’re in the UK, Shah is convinced that this is increasingly what they can expect to get. He says: “The UK has the most developed ecosystem. It’s miles ahead of a lot of other countries in terms of how the UK courts and the legal system function, how the credit bureaus function, what access to data we have. “As long as the regulatory support stays there, I think the sector will bloom.”