CHALLENGER banks are not necessarily a panacea for small- and medium-sized enterprise (SME) lending, ThinCats has warned.
The peer-to-peer business lender said that challenger banks may be held up as an innovative alternative to high street banks, but are still subject to the same regulations.
While challenger banks offer decent technology and use of Open Banking to price and offer loans, they still face issues with capital requirements to protect depositors, ThinCats said.
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“In simple terms, if banks make bad loans, this threatens the assets of their depositors,” the Midlands-based firm said in a blog post on its website.
“If you run a bank, you are covered by these regulations: whether high street, or digital-online-only – it doesn’t matter: rules are rules.
“All banks face restrictions on the risk capital they can have on their books, and SME lending is right up there in the category of ‘risk capital’, whether you like it or not.
“A challenger bank may have better processes, but the same regulations mean it faces harder lending constraints of SMEs as, say, RBS.”
Perhaps unsurprisingly, it describes alternative lenders as the “real revolutionaries” and says SMEs get to work with firms able to make lending decisions based on the quality of their business case, not the requirement to protect depositors.
“If you don’t have deposit accounts, you are not a bank,” ThinCats said.
“This is one area that the revolution in regulation has really opened up the field.
“Alternative finance firms that do not have depositors to protect – for instance, those who provide capital from institutional and retail investors – are not bound by such regulations.
“The challenger banks cannot escape the challenges of the big banks. The real challengers are the specialist SME altfin lenders.”