Powering the North of the UK
Jonathan Thompson is the CEO of B-North, the Manchester-based challenger bank providing funding for SMEs using cloud-based banking technology.
The Northern Powerhouse is a phrase that is often used by politicians, but so far it is hard to see where the North has been driven, with its economy still lagging behind that of London and the South East. And while in recent months the growth rates in the North have been accelerating compared to the rest of the country there still is a lot to be done.
SME’s are the bread and butter of the UK economy. The North is slightly more reliant on SMEs than the rest of the country. According to an IPPR report in February 2019, 99.8% of North England businesses have fewer than 250 employees.
With UK banks undergoing major structural change and having to increase their capital buffers in preparation for a more uncertain economic future, there are many threats to small business lending. The first point is key, as with the prospect of a potentially disorderly Brexit on the horizon big banks are having to keep back their cash in case the economy turns sour. In addition to this, on the operational side, banks are increasingly focusing on retail customers, cutting down on their business relationship teams, that are crucial for SME lending. This is increasing the impact of big banks having extremely centralised models, meaning that the needs of the regions, in particular, the North, can be forgotten. The main challenge is often geographical distance, and often, as a result, a lack of awareness. Another challenge major UK banks face is their failure to invest in technology. Reasons for this underinvestment are two-fold, one is the high capital cost, which in uncertain times can seem unattractive, and the other, and arguably more significant, the sheer complexity of migrating and merging databases. This means many banks have legacy IT systems that are prone to failure, as has been seen in recent high-profile cases.
These challenges have led to the big banks' proportion of domestic lending to business fall from 31% to 8% in recent years. Not only has the overall lending fallen, but the time it takes business to access the funding has risen, meaning it can take SME’s 3-4 months to access new funding. This hurts SME’s. Not only does it mean they have to delay investment opportunities, potentially missing business opportunities, but it can also cause stress to entrepreneurs, as they may have to divert their attention away from growing their businesses. The lead time on loans has the detriment of impacting a key benefit of SME’s, the fact that they are nimble, and fast to react. This is something that will remain essential to survival in the post-Brexit UK, as the economy looks to pivot towards new sectors and global markets. With such a large proportion of the Northern economy based on SME’s, this fall in lending activity has the impact of damaging the north the most.
The Northern Powerhouse initiative aims to change this in several ways, increasing investment in education and transport being just two examples. However, arguably, the biggest impact it could have on the North is the de-centralisation of decision making, to the places the impacts are felt. The initiative aims to make a positive impact on the socio-economic environment of the North. While this alone will not be sufficient to drive the North forward on its own, it does shore up investor sentiment, making the region more attractive to investors.
One reaction to the fall in traditional lending is that more non-bank institutions have started to move into the SME funding space, providing more flexible and agile solutions. However, the benefits of this are far from clear cut. The business models of these non-banks involve charging high-interest rates, which can cause cash flow issues for SME’s, as an increased portion of their turnover will be employed to service their debts, meaning that they have less money to invest in their business.
B-North aims to strike a balance between these new agile high-cost providers, and more traditional, lower cost, but out-dated banks. B-North will provide flexible, adaptable lending solutions 10 times quicker than legacy banks, and at a lower, more affordable cost to the new non-bank providers. B-North will be able to achieve this through coupling our cloud-based banking infrastructure to our revolutionary model of regional lending pods. Through this, we aim to be the clear choice for SME lending. Our strategy, when coupled with the broader initiative of the Northern Powerhouse has the potential to help the North, and the whole country, power forward.
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And that is why B-North were one of many northern businesses who contributed to the Devo 100 letter to Boris Johnson, stating its complete commitment to northern devolution as promised by his predecessor, Theresa May. Handing power back to regional mayors and council bodies will allow those who are most familiar with the northern economy and its needs to drive forward it’s vision.
It’s this very train of thought why B-North have chosen to target SME’s. The founders and senior members of the firm have many years’ of first-hand experience in dealing with SME’s and thus have a deep understanding of what it mean to be a growing enterprise. This understanding is what B-North has tailored its offering around and aims to bring to market in 2020.
For more information on all business in Europe, please take a look at the latest edition of Business Chief Europe.
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