The UK could see a wave of consumers and SMEs entering into financial difficulties in Q4 2021 following the end of the government’s furlough scheme. What does it mean for banking investors?

While the German and French equivalent furlough schemes continue into 2022, larger UK banks and fintech challengers are facing the furlough and self-employment schemes ending, as well as payment freezes on mortgages, credit cards and utilities ending in the last three months of 2020.

For digital challenger banks such as Monzo, Starling and Revolut, who have come through the coronavirus period relatively well so far, there is also a growing pressure to move away from venture capital backing and towards revenue-generating sustainability through lending and other means. Their latest numbers revenues are increasing substantially although losses increased last year in the case of Monzo and Revolut. Starling Bank saw losses narrow and even says it should reach profitability this year. 

Personal insolvency volumes could rise rapidly in Q4, however, and the trend could likely persist into 2021, says David Heathcote, personal insolvency expert at TDX Group.

“The government furlough scheme and support measures such as emergency payment freezes, though much needed, are masking the true landscape of deteriorating personal finances, and may create a bottleneck in personal insolvencies in Q4,” he said.

Large banks, much better capitalised than in the 2008 financial crisis, have already planned extensive new loss provisions. The UK’s digital banking darlings meanwhile are demonstrating an ability to find new sources of revenue quickly while growing customer numbers.

How the banking industry continues to evolve in the era of digital disruption is likely to be shaped by how incumbents and challengers react to the tapering of the furlough scheme and the adjustment to the challenges it will bring.

For more on this topic from the Financial Services Faculty, read Banking: It’s the letter K | ICAEW