Banks: think innovation?

Thursday 26th May 2011
Project Merlin:" Less woolly, more wizard" Courtesy:

UK banking needs a shake up, Scotland may need that even more. Project Merlin shows that the big five are currently £2bn short of hitting small business lending targets, yet Ernst & Young 2010 UK attractiveness survey shows that promoting economic growth with SME development, promoting innovation and stimulating R&D are the three priorities for gaining further investment.

Project Merlin is an agreement between UK government and the UK's HSBC, Barclays, Royal Bank of Scotland and Lloyds Banking Group as well as Santander, which covered the banks commitment  to lend £190bn credit in 2011 (up from £179bn in 2010)  especially to small businesses.

Of this lending, £76bn would be made available to smaller businesses, an increase of £10bn, or 15%, in credit that was available to SMEs in 2010. However, there is no breakdown of the credits geography, institution or type. 

Banks are also to provide £200m capital to finance community projects. And they will provide an extra £1bn of equity capital over three years to the Business Growth Fund, which aims to help small business in hard-pressed parts of the UK.

Finally, banks will pay less in bonuses than they did last year and be more transparent over pay packages.

Some things never change
But it appears that the UK major banks are £2bn short of hitting small business lending targets, including the £76bn to small and medium-sized companies. Lending to date a mere £16.8bn.

Small business trying to talk finance say to the HSBC, cannot even get to first base. There is no bank manager. If you are not making a substantial profits already, your business is deemed not to require financing.

To add insult to injury, the big 5 still seem to have a standard £25 charge on letters notifying clients of rejected payments. Pointless here to urge that a similar email notification, charging say £5, would still yield bank profit some mercy on the client, not to mention lightening the carbon footprint of wasted paper!!

The Forum of Private Business (FPB) responding to the news of the financing shortfall is repeating its calls for better competition, more investment in regional branches and restoration of lending powers to (that totally vanished breed of business people) the local bank manager.  (A Google search for local bank manager returns "Bring back.."Give freedom.. "Expert advice from ..)

Project Merlin Banks in a joint statement predictably say that small business lending demand had declined. FPB's own research suggests many firms have opted to focus on consolidation not growth.

It argues the downturn is a result of mounting alienation due to lenders’ punitive risk criteria and inflated interest rates, rather than indicative of a lack of need for affordable finance.

“I am disappointed but, frankly, not surprised that these SME lending targets have not been met – we are prepared to wait until the end of the year before making a final judgement, but it is clear the banks are trotting out the same old excuses when they are simply not delivering,” says Forum CEO, Phil Orford, urging a move away from "over-centralised tick box mentality."

“There is a widening knowledge gap when it comes to lenders’ ability to gauge small business risk. We want to see banks invest in regional services, and also hand decision making powers back to local branch managers who are best placed to make key lending decisions, based on realistic assessments of individual businesses.”
Pointing to the latest official government figures on SME finance Orford said “ There is a real, pressing need for better, more cost-effective growth finance. The problem is that small businesses are becoming increasingly alienated by mainstream lenders.

“More and more our members seek out alternatives, but one of the major barriers is a lack of competition in finance markets dominated by the big banks. The few new and innovative funding platforms that are out there struggle to gain a toe hold.

Government survey and another fund
The Department of Business Innovation and Skills small business survey recently shows 26% of SME employers sought finance in 2010, up from 23% in 2006-7 and demand higher among firms in primary industries, with 45% seeking finance, contrasted to business services (22%).  Small businesses in construction, transport, retail and distribution were significantly more likely to have sought finance compared to the previous survey.

Some 32% of newer businesses sought to access finance, compared to 22% of those trading 10 years or more. By size, medium-sized businesses (4%) were much more likely to seek finance than small (33%) or micro businesses (25%). In all, 51% of SMEs seeking finance experienced difficulties obtaining funding from the first source they approached – more than twice the number in the same survey carried out in 07/08. More than a third (35%) were unable to obtain any finance at all.

Sectors in which difficulties in accessing finance were most commonly encountered were construction (60%) and transport, retail and distribution (56%). Firms seeking overdrafts were more likely to encounter difficulties than those who sought bank loans (56% compared to 48%).

The answer  also publicised on the Business Innovation and Skills page is Vince Cable helping launch the Business Growth Fund (BGF is not to be confused with BFG),  to help Britain’s smaller and medium sized businesses with an annual turnover of around £10m to £100m.

It is an independent fund of up to £2.5bn, backed by  Barclays, HSBC, Lloyds, RBS, and Standard Chartered - working in collaboration with British Bankers’ Association

The BGF will invest approximately £2m and £10m per business in return for a minimum 10% equity stake and a seat on the board for a BGF director. The Fund will provide long-term equity investment for those growing companies which today do not have access to this source of capital.

Could South West iNets be a model?
Searching for genuinely "innovative" funding in the UK turns up Science South West  and the iNets, which includes SW Creative industries and SW Microelectronic iNet.

The Creative Industries iNet is a £3.2m support programme running until 2013, to help that sector thrive and to boost the South West’s growing reputation as a global creative hotspot.

The Grant for the R&D scheme will offer SMEs three types of grant: maximum funding available will be £25,000 for proof-of-market grants, £100,000 for proof-of-concept grants and £250,000 for development of prototype grants.

But searching Scotland for innovative funding turns up only two sectors Scottish Enterprise and the Tourism Innovation Fund where three new innovative Scottish tourism project ideas, including Glasgow Whisky Tours, are to benefit from dedicated business support and match-funding of up to £30,000 from Scottish Enterprise.

This year recipients include the Glasgow whisky history tour, an adventure mountain biking safari and a unique business English language course in the home of golf for international business people.

Hats off to Scottish Life Sciences Association trustees who have decided to introduce an innovative new funding stream, replacing the traditional Project Grants. The firm intention to continue to support careers of  young people, albeit by a different route.

The Trust will  be funding 4-year PhD studentships (in addition to continuing to offer up to 20 Vacation Scholarships for undergraduates each year).

New awards involve close work between universities & biotechnology companies in Scotland and will incorporate additional training on how to develop science careers in a  difficult and competitive market. We ... aim to have the first PhD studentships starting in the autumn of 2012.

New payment approach
In the US when Jack Dorsey (Twitter founder) started Square, it was because his former boss, friend and co-founder Jim McKelvey lost a handblown glass sale having no way to accept credit cards.

Dorsey set about a less expensive payment approach, with the Square reader, a small device that can read a credit card and plugs into the phone.

Intriguingly his device approach the Square is evolving into an App Store for payments where users sets up a card case in their iPhone and at each shop visited, starts a tab.

When the vendor rings up the bill it charges that tab to the visitor. No cash, no credit cards, no receipts, but both have the details logged in their phones. To date only 50 vendors in San Francisco, Los Angeles, New York, St Louis, and Washing DC are reported using it, but Doresy says it will be available to vendors who want to sign up.

Square system is unlikely to move to the UK any time soon. Banks would not make enough from it. The real problem for innovative UK funding is to devise a system that can squeeze past the clout that the big five have over the UK economy.

Scotland may be able to boast the founder of the Bank of England in 1694,  it has some really modern accounting approaches with a group like FreeAgent that offers smart phone app mobility in accounting for the SME brigade.
But current banking is as hidebound as ever.

How can you look after an SME's finance requirements when what the bank urgently needs is simply to make a hefty ROI to support its salaries, bonuses and golden handshakes?

SME growth route needs help

Ernst & Young's 2010 UK Attractiveness survey shows that promoting economic growth and SME development, promoting innovation and stimulating R&D are the priority measures needed to gain further investment.

Its survey shows that Scottish Development International helped attract 69 foreign investment projects last year – a 35% rise on 2009 figure – creating more than 4000 jobs.

Figures from SDI, Scottish Enterprise and Scottish Government's joint development responsible for helping Scottish companies do business overseas, showed the generation of more than £500m inward investment in Scotland, creating and safeguarding more than 5500 jobs in the 2009-10 financial year.

London alone draw a greater number of projects last year with 289 projects that led to 3229 jobs, less than those created in Scotland.

But to keep up this shining achievement might need, as Ernst & Young seem to indicate, innovative funding for growth and SME development.

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