THE BLOG

Rewiring the Channels of Finance Will Ignite Britain's 'Mittelstand'

29/07/2014 11:27 BST | Updated 27/09/2014 10:59 BST

Excuse me if I'm stating the obvious but the banking system designed to lend to the beating heart of Britain's economy is clearly broken.

The large banks have been beating the drum that they are 'open for SME business,' but the numbers coming from the industry show the exact opposite.

The latest figures released by the British Banks Association confirmed that money flowing to small and medium sized businesses dropped once again in June.

This comes as no surprise. What is surprising is that people keep going back to the banks and expect a different result.

The number of business lenders in the UK has reduced significantly since the credit crisis, with some merging in to larger organisations and others no longer trading. The largest four providers account for over 85% of business current accounts and 90% of business loans.

Where once there was room for customisation and innovation, we now have a traditional lending market that is becoming increasingly homogenised and standardised, further reducing competition.

In a recent study, the markets watchdog - the Competition and Markets Authority (CMA) - found that less than 1 in 7 SMEs trust their bank to act in their best interests and only a quarter feel supported by their bank. This damaging disconnect between credit-hungry SMEs and traditional sources of finance is impacting on the UK economy.

The CMA said two preliminary studies had shown that "essential parts of the UK retail banking sector lack effective competition and do not meet the needs of personal consumers or small and medium-sized enterprises". The Authority has recommended a full competition inquiry into banks that is expected to take 18 months - an absolute age in the world of entrepreneurial SMEs.

The Bank of England recently announced that one of the most striking features of the economic recovery has been the record 4.5 million Britons who are now self-employed. But this growing population is finding it difficult, if not impossible, to secure vital funding. For many of these entrepreneurs there is a tipping point between growth and failure that is closely linked to access to reliable and ready credit.

But they do have another option.

As the traditional banking system stalls, disruption of their industry is happening all around them as alternative lenders step up.

Peer-to-peer lending is one such alternative, providing a more accessible and easier option for Britain's business pioneers. While banks remain hamstrung by legacy technology, the peer-to-peer industry has innovated. It has cut out the middle man to provide low cost, affordable loans - with a good process to boot.

Over the last year, more and more sole traders and business owners have turned to peer-to-peer to expand their businesses. The loan is to the individual rather than the business, and as such it is the faster way of getting a cost-effective cash injection at the crucial time.

There is change coming to the UK banking industry and with it fresh hope for Britain's next wave of entrepreneurs. It's coming from the "bottom up", from the actions of individual savers and borrowers, as opposed to from top down regulation.