Last month Labour's An Enterprising Nation, the report of their Small Business Taskforce, reported last month and included interesting proposals for how to reinvigorate our banking system to the benefit of SMEs. This a theme close to our hearts being the main subject of EEF's Finance for Growth report last November.
Labour appears to have accepted the banking proposals, which broadly is to pilot a network of local banks to lend to SMEs, 'Sparks', under an overarching wholesale institution, the 'Spark Umbrella', that would raise money on debt markets to finance their operations. The Sparks would be initially capitalised by public money, focused on particular geographical areas, and accountable to local stakeholders such as local authorities, LEPs, and business organisations. The geographical focus potentially makes sense as although competition in UK SME banking generally is a problem in some areas it is particularly acute.
There's a lot to like in the proposals, especially the following points:
The identification that 'we need a far more diverse small business banking services sector to give our small businesses access to the best financial services in the world.' This is something we have raised repeatedly - SMEs have too few options on the High Street and too few beyond it.
'...there is a lack of pluralistic competition [in UK SME banking]. With the big banks dominating the market there is little pressure on any of them to improve availability, lower prices or improve service.' It may seem an obvious point but it is worth spelling out again given all the competing rationales circulating for the government's 'business bank' - a lack of competition holds down credit availability, keeps prices higher than they otherwise would be, and leads to poor service.
Sparks would aim to make a profit. We don't need a state-created institute as a 'lender of last resort', lending to companies that have little chance of paying back a loan. The whole analysis of the supply side of the UK SME banking system is that profitable opportunities are going unfunded - this is holding back growth.
The retail presence of Sparks in local communities is also essential. The front end of our banking system is broken - changing the retail landscape must be part of the solution.
At the high level then I think these proposals are definitely on the right track - the focus on diversity and competition, the change in the front end of banking, and the commercial focus of interventions.
Some of the detailed points of the proposals are a little more questionable. For example I'm not sure the analysis of the PSNB impact of the Spark Umbrella's borrowings is correct. With government supplying all the equity, I think the NAO would view these entities as being part of the public sector, even if they were operated at armslength. Reducing this shareholding below 50% could be a way around this...
There are also questions about whether the Sparks would be enabled to take deposits off their SME customers. By not taking deposits the Sparks may be able to get around some of the regulations governing banks that can be onerous for new competitors but crucially, by not offering current accounts the Sparks would be missing the key channel by which SMEs then apply for other types of bank finance. Firing up the SME current account market is absolutely essential.
As well as the Sparks idea this report also includes good ideas for boosting dynamism in the market more generally, including by supporting the creation of challenger banks, introducing risk-based capital requirements to match the different business models new lenders might pursue, and legislating for comprehensive bank data portability. This last is crucial as it is a major barrier to firms switching banks - with showing a new bank your banking history time-consuming and often only partial - and a lack of switching discourages new entrants.
To be fair to the government, it is pushing action in some of these areas already for example through the introduction of the seven day redirection service to give companies more confidence bills won't fall through the cracks if they switch banks.
But the competitive environment and the pace of switching needs more attention. Currently only around 8% of SMEs switch banks each year despite much wider dissatisfaction. The government should draw all ideas for creating a more competitive environment (separate from structural changes a la the Business Bank) into a focused review aimed at generating more competition.