Iwoca slams government’s ‘failing’ bank referral scheme

THE GOVERNMENT’S bank referral scheme is failing and needs a major overhaul if it is to plug a £10bn small- and medium-sized enterprise (SME) funding gap, says Iwoca.

In an open letter to the Chancellor Philip Hammond, the SME finance provider’s co-founder and chief executive Christoph Rieche (pictured) slammed the scheme, which he said had “failed to deliver any meaningful impact”.

“I am writing to you today because one of the cornerstone initiatives designed to help make finance more available to small businesses is at risk of failure,” he wrote.

The bank referral scheme (BRS) was launched in 2016 to help make finance more available to small businesses by referring those rejected by mainstream banks to alternative lenders. Rieche pointed to figures showing just 902 loans have been completed through the scheme, of which Iwoca financed more than half.

It says the availability of finance to small businesses, measured by quarterly business loan and overdraft approvals, dropped by 46 per cent since 2012, despite the number of registered businesses growing, and corporate and consumer lending reaching record highs.

Read more: Industry split on bank referral scheme ahead of Treasury announcement

Iwoca says there is now a £10bn funding gap facing small businesses, and urged the government to do more. It is calling for the government to take five steps to improve the scheme:

• set up a ‘task force’ of industry leaders and policymakers to review the BRS’s effectiveness;
• incentivise banks to make more referrals with a referral fee;
• allow small firms to pay their taxes to HMRC in installments by seeking credit through the BRS;
• use Open Banking technology to make the referral process seamless and reduce form-filling;
• boost awareness of the scheme among small businesses which are declined for credit – currently only two per cent are being made aware it exists.

Read more: Government referral scheme faces competition from NatWest

“Why would a bank incur costs to capture the latent demand for finance from small businesses that fall outside their eligibility criteria? They wouldn’t,” said Rieche. “Introducing a referral fee to – at least – cover their costs might do the trick. This would transform their thinking about how to serve small business customers best and dramatically increase the volume of referrals.”

He added the government has a “huge opportunity” to make BRS a success and support the economy’s small businesses, and this is something Iwoca wants to support as a major stakeholder.

Iwoca says it has approved finance to 35,000 small businesses since launching in 2012.

Read more: Augmentum Fintech invests £7.5m in Iwoca