UK’s Neobanks Eye Expansion As Small Business Lending Grows

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That’s according to a report Thursday (Oct. 15) by the Financial Times (FT), which said this trend comes as small- to medium-sized businesses (SMBs) turn to these neobanks for funding as traditional lenders turn them down.

Now, some SMB lenders are also considering international expansion, including applying for banking licenses and opening branches overseas, sources familiar with the matter told the FT.

The report cited Bank of England data showing that lending to U.K. businesses has dropped to its lowest level for nearly three decades, while SMB loans fell from representing 12% of GDP in 2011 to 6.5% this year.

Christoph Rieche, co-founder and CEO of digital bank Iwoca, told the FT that the growth of small business lenders like his shows that SMB lending can be profitable.

“There are millions of small businesses in the U.K., in Germany, where we’re operating and … there is such a big group [of SMBs] that are so badly served or not served at all,” Rieche said. “We probably get about 40,000–50,000 applications per month, so there’s a lot of demand for finance that is at large not being served.”

The report added that a key selling point for these digital lenders is speed, with many touting that they can write a loan in a fraction of the time it takes a big bank, as well as their ability to cater to businesses that larger banks might consider too small.

Rieche said Iwoca can assess and approve a customer’s loan application in as little as two minutes and 37 seconds, due in part to an automated credit-checking system.

“[More than] 80% of all of our credit decisions are fully automated … with no human intervention,” he said.

Research by PYMNTS Intelligence has shown the troubles SMBs have in accessing funding, with about half of these businesses relying on day-to-day sales proceeds or cash already in the bank to remain afloat.

Just 44% reported access to financing and working-capital solutions, according to PYMNTS Intelligence research into how small businesses finance themselves in uncertain periods.

Another factor behind the lack of working capital access is that 57% of financial institutions cite inaccurate or incomplete SMB records as an underwriting obstacle. Outdated information was cited by 52%, inconsistent information by 52% and limited financial histories by 48%.

The findings come from a survey of 350 financial institution executives in both England and the U.S., detailed in the PYMNTS Intelligence report “Keeping Score: Why Data Quality Determines Lending Decisions for the Smallest Firms.”