The Rise of the Alternative Lender
The financial services industry has undergone considerable change since 2008 – both from a lending perspective and a regulatory standpoint. The overhaul of the financial watchdog has created more emphasis on capital buffers i.e. liquidity, and the part banks play in the global economy and ability to manage default risk. This increased regulatory scrutiny has forced banks to evaluate their lending practices, opening the market further to ‘challenger banks’.
Vince Cable, the Business Secretary, has championed the need for a true challenger in the market place. He wants to increase competition and the flow of lending, particularly to smaller businesses, which he argues are being ignored by the larger banks.
In fact, all banks in the UK may soon be required to refer businesses declined for credit to alternative providers. The legislation, currently making its way through Parliament, will help strengthen opportunities currently available to SMEs. The Queen, during her recent speech to open Parliament, said that “Legislation will be introduced to help make the United Kingdom the most attractive place to start, finance and grow a business. The Bill will support small businesses by cutting bureaucracy and enabling them to access finance.”
This move is in response to the considerable rise in the number of alternative lenders, such as peer-to-peer, operating in the UK and the ongoing difficulties SMEs face when attempting to securing finance. The Financial Conduct Authority introduced measures to regulate the sector on April 1, which were by and large widely accepted by the industry, opening it up further.
However, SMEs are not the only group to be affected by this hiatus. Large organisations, typically looking for access to cash for M&A, IPO and development finance, are desperately looking for help from alternative finance providers. Historically, UK investment banks, high street banks, building societies and specialist banks provided the funding to businesses that operated in the target market at relatively attractive levels. However, this has all changed as a result of the credit crunch of 2008. A new breed of funds, particularly debt funds, has evolved that are built on lean business models, with simplified structures of competent loan people to fill the void left by the banks.
Depressed liquidity levels, credit losses and the new Basel III banking regulations that require higher capital levels, mean that the restrictions on traditional bank lending are unlikely to change in the medium term, leading to a new, attractive market of independent funding providers.