Special Features

The future of business banking

David Castling - Atom Bank
|
17th December 2020
David Castling Atom Bank
"2020 should see the scaling down of government intervention, but the holding off from debt recovery through taxation... for now. But it’s coming."

2020 has had a huge impact on all business and Covid-19 has changed the business banking landscape dramatically.

1. Technology driving efficiency

Predictions are unrealistic. If 2020 has taught us anything it’s that curve balls can and do happen and the strengths in our industry clearly sit with the ability to adapt. But with that caveat, here I go. The shape we were, is not the shape we will be. Someone wiser than myself once stated that “necessity is the mother of all invention”, and we have all found that things we previously thought hard, unpalatable or impossible are now reality. Expect to see the measures put in place with lenders and intermediaries that have driven more efficiency to remain with us, whether this be the role of the BDM and business development, use of digital communication/meeting practices, emerging technologies regarding applications or data sourcing and evaluation. We have been forced, at pace and with risk, to move the dial and I suspect even in the event of a highly effective and widely distributed vaccine a lot of these practices are here to stay and will continue to evolve.

2. Balancing the books

2020 should see the scaling down of government intervention, but the holding off from debt recovery through taxation... for now. But it’s coming.

The ONS stated public sector debt now tops £2.076t from the end of October 20, 100.08% GDP and a level not seen for many decades. The early warning signs signalled from the chancellor are now emerging regarding financial sustainability and as things stabilise in terms of a return to normality we should brace for measures required to balance the books.

3. Reduction in demand

The impact of supply saturation. What demand for commercial lending in 2020 remains to be seen, the huge fiscal stimulus provided by the government via the various versions of Coronavirus Business Interruption loans and Bounceback lending has far exceeded the normal lending rates. To date, there have been repeated extensions to government backed lending schemes - and no one would bet against either further revision to deadlines or a replacement scheme as the UK continues on it’s path to economic recovery.

But it raises the question of how much consumer demand will remain in the coming financial year and how lenders will deal with this. The most recent published data from UK Finance states there have been £65.5b in loans approved (1.5million application approvals) against an SME market that was sanctioning circa 50,000 loans a month to then sky rocket to 1million approvals in June 2020. If the government fails to replace the schemes as they come to end in January 2020, what will normal look like?

Lenders will understandably want to price for risk without the safety of a government guarantee, but may face stiff competition to battle it out for those still requiring finance who either missed the deadline or failed to qualify for one of these loans when they were available.

4. Underwriting reform

Unlike investments, where we are frequently told past performance is not a reliable guide to future performance, it is one of the bedrock principles for commercial underwriting. Which under normal circumstances, would be fine. Banks will need to negotiate away from a rearward looking view for assessing risk in the commercial world to something more nuanced. Business performance over the last 12 months, in most instances (not all) will look troublesome. Lenders that have snazzy algorithms and automated decisioning could find that without recalibration simply every case declines, and those that use data and underwriter judgement are going to need new guidance on how to move forward. The customers profile for the last 12 months won’t look good, the 12 months prior to this arguably too old to be relevant given the seismic shift in the economy. Are we going to see the emergence of real time data through Open Banking and cloud accounting information really to come to the fore in 2020?

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