by: Richard Anderson, former Chair of BCR, and iNED at Innovate Finance member ClearBank Group Holdings
Over twelve months ago, I stood down as the Chair of Banking Competition Remedies as we moved towards the closure of the company. I remain immensely proud of what we achieved. But now BCR has completed its mission and is well on the way to being wound up. Above all, BCR is a story of resounding FinTech success which already runs the risk of being forgotten together with the valuable lessons. So it is worth asking: did we achieve what we were tasked to do? And are there any lessons to be learned from what we did?
Banking Competition Remedies was established in 2017 to disburse the funds arising from the state aid penalty levied on RBS Group (now NatWest Group), arising from the UK government state aid granted in 2009 during the financial crash. RBS had failed to spin out Williams & Glyn’s Bank, so between them the European Commission and HM Treasury devised the Alternative Remedies Package (ARP).
The ARP consisted of two elements:
- A £425m Capability & Innovation Fund (CIF) to provide grants to awardees to help them improve their banking and financial capabilities for small and medium-sized enterprises in order to compete with NatWest.
- Up to £275m for an Incentivised Switching Scheme (ISS) to provide funding to participants, in order to financially incentivise NatWest’s Williams and Glyn SME banking customers to switch their business current accounts to the participants.
I came on board as a non-executive director in January 2020, just as reports were emerging of a new coronavirus, which was about to trigger another economic crisis. I subsequently became chair later in the same year.
Competition & Innovation Fund
In my view there is no doubt that the totality of the Alternative Remedies Package (ARP) has achieved its objective of increasing competition in the SME banking market. The CIF scheme leveraged considerable additional funds into the development of new products and acted as a catalyst in raising significant further investment into the UK FinTech sector.
I would particularly draw attention to three key successes:
- Competition: BCR was established to rectify issues in respect of state aid following the Global Financial Crisis with a principal objective of enabling effective competition in the SME banking market. An impressive 30% of SMEs now hold banking relationships with CIF awardees including those which transferred under ISS. The consequence of that is there is now real competition with the established big banks who formerly dominated the sector.
- Growth: BCR made grant awards under the CIF scheme of £425m. As a condition of those awards, we agreed co-investment of £560m from awardees. And since being awarded CIF funds, a further £2.8bn of Private Equity investment has been made into those companies. A great example of how funding can unlock significant private investment,
- Innovation: The 21 CIF awardees have transformed digital offerings, including introducing over 250 new products that have democratised access to business tools and financial products, enhanced and integrated FinTech ecosystems including new platform models, closed the funding gap for SMEs through alternative finance and have greatly improved the financial health of SMEs through new partnerships, relationships, and integrations. This has supported a significant portion of the fantastic success of FinTech in the UK over the last couple of years.
To move the dial on competition for SMEs in the UK financial services market was always a substantial ambition. BCR sought to address it through a broadly-based portfolio of participants and awardees stimulating choice for businesses in addressing their needs for financial services. It is a given that in making awards to some applicants, and inevitably rejecting even more applicants, we were never going to please everyone. Nor were we able to guarantee success in every case. In my view, it is a testament to the quality of awardees of CIF funds that they have remained focused on delivery in spite of some particularly challenging and unprecedented headwinds over the last years. They have challenged the status quo in the provision of financial services to UK SMEs and in many cases are now partnering with more traditional providers to provide SMEs with enhanced offerings. BCR awards have been utilised positively and have contributed significantly towards the healthy position in which both FinTech and SME banking providers find themselves today. This will be the lasting legacy of BCR and the ARP of which all involved will be justifiably proud in the future.
Which firms benefitted from CIF? In accordance with the terms agreed by the UK Government and the EC, CIF was initially split into 4 pools. This was subsequently expanded by two further pools on the return of funds from awardees who were unable to meet the terms of their awards. The details of the pools and the awardees are set out in the table below:
| Pool | Purpose | Awardees |
| A - £280m (reduced to £230m with return of £50m from Metro Bank) | To develop more advanced business current account offerings and supporting products for SMEs. | Starling Bank, Metro Bank*, ClearBank/Tide |
| B - £80 million (reduced to £30m with return of £50m Nationwide) | To modernise existing business current account offerings, to develop new ones, or to create supporting products for SMEs. | Nationwide* Investec, The Co- operative Bank |
| C - £40m | To expand business offerings to include lending or payment services – including international payment services – for UK SMEs. | Atom Bank, iwoca, Modulr, Currencycloud |
| D - £25m | To facilitate the commercialisation of financial technology relevant to SMEs. | Codat, Fluidly, Form3, Funding Options, Swoop |
| E - £100m | £80m to Pool A, B and C Bodies and £20m to Pool D Bodies – Reduced | Onfido*, Funding Xchange, Codat, ezbob*, Fractal Labs (t/a tomato pay), Previse, Virgin Money, ClearBank/Tide, Ebury Partners*, Kriya (formerly known as MarketFinance) |
| F - £12.5m | £5m to A, B, C Bodies, £7.5m to D Bodies | Cashplus Bank, Codat, Swoop |
* Returned funds: Nationwide - £50m, Onfido - £5m, Ebury - £7.5m, ezbob – c.£0.4m (ezbob monies returned in 2022 and distributed to Business Debtline)
Pools A and B were utilised by awardees to build comprehensive SME banking and finance solutions, contributing to their acquiring approximately 30% market share in UK SME business accounts. This growth has presented significant competition to existing banking providers and improved choices for UK companies. Notably, many of these awardees integrated lending and finance into their overall propositions. All awardees invested substantial amounts of their own capital alongside CIF grants in fulfilling their business cases.
The other pools (C to F) were awarded to companies developing financing solutions, which included:
- The development of marketplaces
- The integration of technology into traditional lending journeys
- Offering alternative financing options
- Optimising working capital for SMEs
- Utilising open banking/data solutions
Many awardees focused on enabling real-time financing information for SMEs to optimise their choice of financing options.
Some case studies based on BCR reporting by the companies themselves, as at the end of 2023, are included as an attachment at the end of this post.
Of course the story of BCR will in part be remembered for the fact that both Metro and Nationwide returned £50m each. Some criticised us for making poor initial decisions. I would argue that the circumstances changed, and we took those refunded sums and put them out again promptly to a new rounds of awards.
Incentivised Switching Scheme
Despite scepticism in the press, the ISS achieved its objective by disbursing approximately £250m of funds as dowries to organisations that met the criteria. In the twenty-eight month life of ISS which ended in June 2021, BCR oversaw the switching of over 69,000 Business Current Accounts (“BCAs”) which represented more than 50% of the SMEs that switched through the Current Account Switching Service (“CASS”) during that period and just over 64% of the 108,000 SMEs that consented to be contacted by one or more of the participating banks. This innovative scheme which was part of the Alternative Remedies Package has proved a success, especially given the challenging external environment: Brexit uncertainty, followed by Covid-19 meant that many organisations were loath to change banks during periods of uncertainty. The remaining money was split between that banks that had completed the most switches, namely Starling, Virgin Money and TSB.
The lessons
It is worth noting that even in the heady FinTech funding days of 2018 to 2020, the competition for CIF awards was intense. All of the applicants were assessed for eligibility and their business cases intensively reviewed and assessed. Many applicants were inevitably disappointed, but in every case an award was only made where there were matching (or better) funds from other investors. Most had already been subject to earlier investment funding rounds, but in every case applicants put forward business cases that would accelerate their success and the awards enabled them to raise significant future investment funds. In other words, these were effectively scale-up or additional funds, rather than pre-seed or seed funding. In all cases the quality of the management team was critical to the awarding process.
One of the key lessons that the board of BCR had to learn rapidly was the need for us to be as agile as any FinTech: every single business case was impacted in turn by Brexit uncertainty pending the UK’s eventual departure from the EU, then Covid-19, followed by the Ukraine war and the subsequent inflation. We recognised that nobody could be delivering against the same business plan that supported the original application by the time delivery was being assessed and when the scheme was wound down. We worked with the awardees to ensure that they were supported but remained subject to challenging targets as business plans inevitably changed multiple times through the period.
The ultimate question has to be whether the success of the CIF scheme could be replicated. In my view the success of BCR represents a case study of how targeted interventions such as the ARP can boost the competitive landscape for the benefit of customers and the economy as a whole. As pension funds are freed up to address SME funding gaps, and as the British Business Bank assesses its role in financing SMEs, the rigour adopted by BCR is well worth learning from.
Of course, we should not forget that the completion of the ARP represented the opportunity for NatWest to remove the contingent liability in respect of State Aid penalties hanging over them since the Global Financial Crisis. I hope that the Treasury, which negotiated the ARP with the European Commission and NatWest, are as proud as we are in having delivered this result for British SMEs. As the UK Government seeks to unlock growth and investment and develops its industrial strategy, I would encourage them, to consider how they can support economic growth, small firms and investment in the strategic FinTech sector by learning from the success of the BCR scheme.
On a personal level, I remain thankful to all of those who worked in BCR and also our partners, those involved in the ISS and grant awardees from CIF. You all know who you are!
EXAMPLES OF ENABLING ACCESS TO FINANCE FOR UK SMES
Through their efforts, CIF awardees have significantly reduced entrance costs for new SME lenders in the UK, estimated at up to 80%. Moreover, they have played a crucial role in modernising legacy lending processes by embracing digitisation. The functionalities developed by the awardees will be instrumental in enabling SMEs to access funding swiftly as the economic situation improves, potentially accelerating the UK's recovery. Their contributions have been pivotal in reshaping the lending landscape, fostering inclusivity, and supporting the growth of SMEs in the country.
DIRECT BANK LENDING
In respect of direct bank lending as part of their overall CIF SME propositions, the challenger bank awardees committed to providing £6.9 billion through their balance sheets and facilitating loans from other providers. Based on the most recent update, the following banks – Starling Bank, ClearBank/Tide, Metro Bank, The Co-operative Bank, Investec, Virgin Money, and Cashplus Bank - have collectively achieved £6.1 billion of that target. In this blog I cannot include details of all awardees and, therefore, have highlighted below some examples based on public commitment updates.
STARLING BANK LIMITED
- Starling developed a comprehensive SME proposition, offering a range of 47 SME banking products. By the time it submitted its final report to BCR, Starling had successfully attracted 452,000 SME customers.
- Among these, 54,000 SMEs directly benefited from £2.4bn in lending made accessible through automated and secure processes, enabling loans to be delivered within minutes.
- To further strengthen its lending capabilities, Starling introduced advanced credit decision functionality, enhancing its underwriting process.
CLEARBANK LIMITED/TIDE PLATFORM LTD
- ClearBank/Tide’s credit proposition acknowledges that smaller businesses often face funding challenges related to cashflow.
- It delivered a number of solutions tightly linked to the BCA with a focus on avoiding cashflow issues (including invoice chasing, next-generation direct debit, and a Pay-On-Time rating), protecting against cashflow issues (by integrating with debtor insurance providers) and bridging cashflow (through working capital solutions, integrating the best providers and, with the SMEs’ permission, providing lenders with transaction data available from the BCA).
ATOM BANK LTD
- Atom received over £2bn of applications for its secured lending CBILS and RLS products. It was accredited for the third phase of the British Business Bank’s RLS and was the first non- high street lender to begin lending under the programme.
- By Q1 2023, £423m of BCR-attributable secured lending had been completed, with an additional £150m in the pipeline. It built a radically enhanced pricing engine and quote tool that enables it to provide a quote on a secured lending application within 60 seconds.
It also responded to the rising interest rate environment by delivering its first fixed rate business lending product. - To ensure small businesses have the confidence to seek the external finance that is right for them, its onboarding process captures financial aspirations, generates bespoke customer solutions, has seamless API integration with existing bank accounts and accounting software and enables use of alternative performance data, including eCommerce and Point of Sale to assess under-served ‘thin file’ applicants. This delivers instant verification of business trading history and performance and reduces reliance upon outdated Companies House data and manually submitted management accounts where possible.
- Atom’s proposition development in partnership with the University of Newcastle’s FinTrust programme, is intended to avoid unintended bias and reduce financial exclusion in the lending process. It has also established a partnership with Durham University which supports the transition to net zero.
- Atom became a Registered Firm with the Lending Standards Board in 2022.
It is clear that challenger banks have become a critical source of finance to the SME sector. They have also driven the customer experience to a new level as well as increased competition and innovation in the banking sector.
However, they continue to face regulatory hurdles that pose challenges to their ability to do even more in future. This includes but is not limited to the gold-plating of Basel 3.1 rules, and existing (as well as proposed revised) thresholds set under the minimum requirements for own funds and eligible liabilities (MREL) regime. Innovate Finance explored all of this in their Better Banking report last year.
EY’s October 2024 report entitled Banking on the mid-tier here also neatly highlights the key role of small and mid-sized banks in providing innovative and in-demand banking services to SMEs and retail customers in specific markets and regions, whilst operating within the protection of the highly regulated banking sector.
ALTERNATIVE LENDING
The combined alternative lending ambition offered by challengers was £13.8 billion in the last business case round in 2022. While latest suggestions are that this is more likely to deliver £9bn, there are a number of important achievements and other ways that awardees have created strong impact that SMEs will be able to leverage once the economy picks up. Again, a number of examples have been used with information sourced from public commitments updates.
CODAT LIMITED
- By the end of 2023, Codat will have positively impacted over 300,000 SMEs by giving them access to new integrated products and services developed on its platform, significantly reducing administrative burden, and improving access to capital.
- It has evidenced the versatility of its offering on many occasions, with one example being the rapid development of an application journey for CBILS and BBLS for a Tier 1 bank. Developed in just 10 days from proposal acceptance to launch, this overall program helped nearly 340,000 businesses apply for £22.5bn in funding via this lender.
- On average, Codat clients funded 58% more than their pre-Covid share of the SME loan market, due to Open Banking making it easier for businesses to apply and banks to process applications.
- Codat's platform has been used by banks, alternative lenders, insurers, payments/point of sale providers, cash flow forecasting tools and many more to accelerate development of new and improved integrated products for SMEs and is now deployed across 200 financial service and software providers.
FUNDING OPTIONS LIMITED
- Funding Options has used BCR funding to help facilitate over £440m of new lending to UK SMEs. It launched Funding Cloud: Insights, which provides market knowledge and intelligence to the small business lending industry and “Funding CloudTM Connect” a technology and data-driven platform that connects businesses, lenders, and partners to facilitate fast, accurate and secure access to funding at scale to achieve fully digitally underwritten lending decisions in real time empowering accountancy firms and other professional companies to provide vital support to local SMEs.
- The shortest timeframe achieved to date from submitting a finance application to full approval by a partner lender is 20 seconds and from a business submitting a finance application to having the money transferred into its bank account is 18 minutes.
- It continues to work closely with its bank partners to support them with its digital “Alternative Yes” solution for their business customers. It was acquired by Tide in February 2023 to complement Tide’s SME business offering.
SWOOP FINANCE LIMITED
- Swoop is a marketplace platform for small businesses to access financial products. Swoop offers SMEs and their financial advisors access to loans, investments, grants as well as products within banking, foreign exchange, insurance, and energy.
- SMEs build their profile in minutes as Swoop does the heavy lifting via API integrations with customers’ multiple data sources to enable a better understanding of their financial position, showcase eligible funding products and enable the SME to apply for those products.
- To date 600,000 SMEs have used the virtual CFO tool to access financing solutions and cut costs across utilities, banking and FX resulting in £2.49bn in finance raised and saved for UK SMEs.
- Its aggregated lender API allows eligible SMEs to obtain instant loan offers based on their integrated data through banks and lenders such as Barclays, NatWest, iwoca, YouLend and ReTail Capital.
- Swoop released a white label version of its marketplace offering which has been taken up by NatWest, Lloyds, British Chamber of Commerce, Hiscox, ICAEW, UMI and Capify.
IWOCA LTD
- iwoca recognised that 70% of its customers were using credit facilities to finance the gap between issuing an invoice and receiving or making payment. It introduced iwocaPay, a financing solution at the point of invoice, providing SME sellers with the option to extend flexible payment terms to SME buyers while getting paid.
- Open Banking has enabled iwoca to launch OpenLending, a self-serve platform opening its lending stack to the entire ecosystem of BCA providers, FinTechs, brokers, accountants, and bookkeeping platforms. It aims to originate £400m through OpenLending by the end of 2025 and is currently on track having achieved £126m to date.
- Personal guarantees play an important role in enabling finance for early-stage businesses; however, as businesses evolve, financing options do not necessarily follow suit. By means of an asset debenture structure to break the link between business and personal credit, iwoca leveraged its technology and risk expertise to develop a new product that does not require a personal guarantee. It made the process digital and now delivers a decision in hours rather than weeks or months. By the end of 2022, it had originated £250 million.
