COVID-19 government schemes disrupt banking competition
23 April 2020: challenger banks would have been better equipped to distribute government funding, an expert industry banking panel has reported, although scale would have been an issue. Financial Services Faculty commissioning editor Brian Cantwell reports.
The government might have found better partners in challenger banks rather than the High Street banks to distribute essential cash to British businesses, one thinktank panel has found.
In a wide-ranging debate on the effects of the COVID-19 crisis on British banking, senior members of the UK business banking community argued that challenger banks would have been better equipped to handle the task of distributing government funds online.
The fintechs, including challenger banks and alternative funders, were well-positioned to get cash out quickly, said the group, and could deliver the key credit checks quickly and online. This included an ability to manage digital anti-money laundering checks.
In a discussion arranged by the Centre for the Study of Financial Innovation (CSFI), the decision by the government to favour the so-called CMA9 banks, including state-owned RBS, to handle the SME and corporate loans designed to keep businesses open through the crisis was criticised due to their inability to handle the task at pace.
The decision to favour the traditional banks was also seen to have destroyed competition in the banking sector, itself hard-won since the global financial crash of 2008, which created the conditions for challenger banks to originate.
It was even suggested that the Competition and Markets Authority should be looking at such “favouritism” as state-aid.
“We really risk seeing some key players, who provided a key role in supporting UK SMEs who don’t have a relationship with the CMA9, to then disappear. To try and fill that void will take a lifetime,” said Nick Ogden, founder of successful financial startups such as WorldPay and ClearBank.
The panel believes that the larger challenger banks should survive the crisis, as they are well-funded businesses. However, capital-raising conditions will be very difficult for the smaller challengers, and those which have conducted bad business were likely to get into trouble.
Offering hope to the challengers, the panel stated that they believe the new normal of coronavirus and social distancing could force the mass adoption of digital banking, meaning people will be looking for good digital service providers in future as behaviour changes to avoid branches.
There will also be a speed in the shift towards a cashless society as money continues to be associated with the spread of the disease, and these trends will favour fintechs over traditional providers with poor digital offerings.
The issues raised by the CSFI panel were echoed today by Nicky Morgan MP, who published a letter in the Times asking the government to consider using fintechs to distribute the business funding.
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