What does the announcement of RBS's referral agreement with Funding Circle and Assetz Capital mean for the long term prospects of SMEs' access to finance?
Faced with a thriving Alternative Finance sector that enjoys the full and enthusiastic backing of Government, the out-of-favour, but still powerful banks have had some tough commercial and political decisions to make.
At the risk of over-simplification, one fundamental poser must have been whether to: a) wait and see what legislation eventually comes out of the Small Business Bill that is currently passing through the Upper House, and then conform to the minimum degree; or b) not wait for formal legislation and forge early strategic alliances in advance of being compelled by law to ‘play nicely’ with their noisy new neighbours.
Two banks have already shown their hands by breaking ranks and opting for the latter course. First, Santander announced last June that it had forged an alliance with Funding Circle. More recently, and perhaps more significantly, Royal Bank of Scotland (RBS), which controls 1/3 of the small business market, has announced links with two P2P lenders, Funding Circle and Assetz Capital, making it clear at the same time that there may be more to follow.
State-controlled RBS was at pains to point out that it would not be receiving any financial kick-back from its new allies for customers successfully referred-on. That simple statement must surely set the rules for the rest should they be thinking along similar lines.
So, have RBS and Santander been shrewd in acting earlier than their banking brethren?
By cooperating of their own free will, both banks will believe that they have had the pick of the bunch and stolen the march on their rivals – although that is not to say that similar conversations have not been going on in parallel. Who will be the next to break the surface with a deal?
The deeper question is whether such deals are good for SMEs in the long run. On the up-side, they provide a clear avenue to a second chance if the bank says 'no' and create an opportunity for a small number of alternative finance providers to firmly establish themselves with critical mass.
On the other hand, the channelling of loan opportunities to a select number of providers under the auspices of private arrangements is a dilution of the competition in the marketplace that the Government has been so eager to create. The whole thrust of the Alternative Finance movement – and part of the reason it has had such vigorous backing from Government – is that it has introduced choice for the SME.
The deals may not create commission flows from provider to introducer, but they might create a dependency that ultimately leads to control being ceded. The unwanted corollary is a few large peer-to-peer lenders prospering on the introductions from their friendly bank and implicitly run by them from afar - whither the revolution?
The gap in the market that let the new players in was the lack of access to finance for the SME and the poor returns available for investors.
That independent P2P lenders are helping to solve that problem is evidenced by the explosive growth of the alternative finance sector. Bank referrals are an important part of the contination of that growth and the quest is now for an effective referral system that provides a supportive framework for businesses seeking finance.
Only time will tell if the optimal definition of that system is private partnerships between the banks and their young rivals.