Coronavirus: Fintech sector 'squeezed' by Bounce Back loans

Oscar Williams-Grut
·Senior City Correspondent, Yahoo Finance UK
·3 min read
Funding Circle CEO and founder Samir Desai signed the letter to the Treasury. Photo: Funding Circle
Funding Circle CEO and founder Samir Desai signed the letter to the Treasury. Photo: Funding Circle

Fintech businesses are lobbying the Treasury and the Bank of England for cheap funding to allow them to compete with big banks throughout the coronavirus crisis.

Innovate Finance, a group representing the UK fintech sector, has written to chancellor Rishi Sunak asking him to push the Bank of England to offer cheap funding to non-bank lenders. The letter was signed by the chief executives of 15 leading fintech lenders, including Funding Circle, iwoca, and Tide.

The Bank of England launched what’s known as the small and medium-sized enterprise term funding scheme (TFSME) in March. The scheme allows banks to borrow funds directly from the Bank of England at close to the base interest rate of 0.1% to encourage lending to small businesses.

Read more: Lending businesses could be 'decimated' by COVID-19 without government support

However, non-bank lenders are excluded from the scheme. Innovate Finance chief executive Charlotte Crosswell told Yahoo Finance UK that puts them at a disadvantages.

The problem has become particularly acute since the launch of the government’s Bounce Back loan scheme last week.

Accredited lenders are required to offer business loans at fixed a rate of 2.5% for six years. That is unaffordable low for most fintechs, which borrow money themselves to lend. As a result, fintechs face being undercut by big banks on business loans.

“To be able to charge a six year loan of 2.5% is an incredible challenge for anyone who is not a deposit taking bank, just to try and get that cost of capital,” Crosswell said.

“They are potentially losing viable businesses of their own who are having to go back to a high street lender to be able to borrow that amount.”

Bank of England governor Andrew Bailey. (Tolga Akmen - WPA Pool/Getty Images)
Bank of England governor Andrew Bailey. (Tolga Akmen - WPA Pool/Getty Images)

Opening up the TFSME scheme to non-bank lenders would solve the problem and help the government extend loans to businesses faster.

A similar funding scheme in the US — the PPP liquidity fund — does cover non-bank lenders. The US lent $350bn (£284bn) to small businesses in two weeks under its scheme, while the UK has extended just £32bn of state-backed loans to businesses in around eight weeks despite £330bn being promised.

A spokesperson for the Bank of England declined to comment.

The central bank administers the TFSME and operates independently of the Treasury. However, the Bank of England and the Treasury have so far coordinated their response to the COVID-19 pandemic, suggesting the chancellor could have some sway.

A spokesperson for the Treasury said: “Our Bounce Back loans are helping thousands of small firms get finance quickly at a low, affordable rate and with a 100% government-backed guarantee. All lenders are welcome to apply to be accredited to the scheme.”

Read more: Just 10% of promised government-backed coronavirus loans reach businesses

Crosswell said that without support the fintech sector would suffer.

“What we have to be careful of is we don’t take away competition through this process,” she said. “If you take a non-bank lender that then wants to acquire a customer back - are they going to have as strong a case? Have they then lost a relationship?

“Anything that’s going to result in a lessening of competition after this crisis is also very significant.”

The government has already asked all lenders to offer loan repayment holidays — known as forbearance — to customers. However, fintech lenders, most of whom borrow money to then lend, are not being given repayment holidays themselves, creating pressure on cash flow in the business.

Read more: Banks 'ask companies to stop paying loans' to get government support

“They’re getting squeezed on forbearance, they don’t have access to distribute Bounce Back loans,” Crossswell said. “They’re getting squeezed in the middle.”

The Treasury spokesperson said: “We recognise the vital role that alternative lenders and challenger banks play providing credit to SMEs, and are committed to promoting competition in the sector.”