Nationwide hands back £50m fintech grant
On Friday, the Nationwide Building Society announced it was abandoning plans to develop business banking services, raising questions about the viability of taxpayer-funded banking competition remedies. Nick Levine investigates.
Nationwide told Reuters on Friday 3 April that the virus had brought the curtain down on its business banking proposition. “COVID-19 has changed the medium-term interest rate landscape, meaning the business case for entering the market is no longer viable,” said Chief Executive Joe Garner.
The decision to pull the plug on its business banking plans will cost Nationwide around £70m, including £50m in grants it will hand back to the capabilities and innovation fund (CIF) set up by the RBS Banking Competition Remedies (BCR).
After going a rocky patch when it miscalculated its risk-weighted assets last year, Metro Bank also handed back £50m of its £120m CIF grant after falling behind on its pledges.
Things have changed
As banks overseen by the Prudential Regulatory Authority, both grant recipients are subjected to a higher level of transparency than many of the other beneficiaries of the scheme. But reports are now circulating that other CIF grant recipients such as Starling Bank and Fluidly are planning to furlough employees.
Given the more limited level of disclosure required from privately funded business, the best available public source of information on what is happening there lies in the commitment reports the fund recipients have published.
A few weeks ago, AccountingWEB asked me to prepare a progress report on the Banking Competition Remedies project. As we have seen, this review was overtaken by the coronavirus - like so much else in the past month. With questions are being raised in some quarters about the overall viability of the initiative, this article will dig into those update reports to see whether there is still room for the CIF project in post-Covid-19 business banking landscape.
Fixing business banking
The 2007-9 financial crisis left business banking in a mess. The Banking Competition Remedies took £425m from penalties levied on RBS Group (since renamed NatWest) and channeled to 15 digital banks and financial technology (fintech) developers during 2019.
The so-called capabilities and innovation fund (CIF) was designed to encourage competition and technology innovation to bring better banking and finance facilities to the small business market. To get their hands on the money, recipients had to put together formal applications to either provide business banking services or to develop and improve fintech products available to SMEs.
As part of the CIF package grant recipients were obliged to publish a set of public commitments and report quarterly on how they were doing against those targets. The latest updates for the fourth quarter of 2019 show that some recipients are delivering on their public commitments, while others are falling behind.
Falling behind on pledges
Metro was the first company to backtrack on its BCR commitments. After reporting a £130.8m pre-tax loss in 2019, Metro modified its business case to cut back on a number of pledges. The number of new branches Metro committed to opening in the North has been revised down from 30 to 15, with a resulting cut in associated jobs. The timelines for delivering new technology solutions have also been pushed back. The plan for an end-to-end accounts payable solution, with automated reconciliation will now have to wait until 2022. In recognition of these changes, the bank handed back £50m of its £120m grant.
Nationwide landed £50m of Pool B funding a year ago on the back of pledges to build a tech-based business banking solution. Even before the Covid-19 announcement that it was pulling out of business banking, the launch of its mobile app was being pushed back to further delay the roll-out of financial products associated with its new-style digital business accounts.
All the work that went into the project will be written off, as well as handing back the original £50m grant.
Accountant and software partnerships
One of iwoca’s key commitments was a collaboration with Xero to develop a customised credit product to give Xero’s 463,000 UK users access to finance.
According to iwoca commercial growth director Colin Goldstein this commitment is on track: “Iwoca and Xero are currently undertaking deep research with a view to a potential customised finance solution in early 2021. This will be designed and built specifically for Xero’s customers, and make tailored finance products directly accessible from within the core Xero software.” After an initial design workshop to prioritise the key features, the partners are moving into in-depth customer research this quarter to create feasible product concepts.
Starling’s grant application was based on rolling out business banking services, alongside complementary lending products and accountants were key players in helping the bank meet its headline pledges.
“By building strong partnerships with accountants we can continue to support their clients requirements and also play an important part towards our goal of growing towards 450,000 business customers by the end of 2023,” said Oliver Krishnan, accountancy partnerships manager at Starling.
By the end of Q4 2019 the bank had acquired 89,291 business customers, exceeding its first year target of 51,000. To date the bank has lent out £1.03m of business funding as part of a test environment and is committed to lending £913m by the end of 2023.
Fluidly’s pledges revolved around creating an AI-powered financial marketplace that will offer SMEs better access to financial products. This will complement the developer’s core cashflow offering. Fluidly is also working with professional accounting bodies to deliver CPD training around cash flow advice and undertook to build a partner network of 10,000 accountancy practices serving small firms.
Fluidly founder and CEO Caroline Plumb commented, ““We’re ahead of plans to deliver a funding marketplace, and have already worked with accounting firms, software vendors and financial providers to bring our new funding offering to SMEs.”
Scale up recipients
Codat is using its BCR grant to accelerate the deployment of its API connector to support the small business economy. The developer is using the funds to build a network of online partnerships with banks, lenders, insurers and cash flow forecasting companies that connects into the main cloud accounting software platforms.
“BCR funds have helped us significantly in our drive to get the benefits of closer financial integration out to market for small businesses,” said Codat co-founder Alex Cardona. “We're seeing a dramatic growth in the lenders, in particular, who want to automate the process of collecting data manually from their SME customers and now have tens of thousands of small businesses linking their services every month through the Codat platform.”
Funding Options is using its £5m grant to increase the volume of businesses seeking finance through its online marketplace. The plan is to double the number of alternative lenders on its platform from 50 to 100 and to channel £500m to 10,000 new small business borrowers by the end of 2022.
During Q4 Funding Options exceeded a number of its pledge targets, achieving £40m in lending - an increase of 30%. While the Q4 commitment document makes promising noises, Companies House is showing that Funding Options missed its filing deadline for annual accounts to 30 June 2019 - an odd discrepancy for what is a publicly supported financial institution.
End of year report card
The initial Q4 reviews would probably award the CIF a mediocre pass mark - while there were some prominent disappointments on show, most of the recipients claimed to be “on track” to meet their commitments.
But the level of detail was disappointing. The Covid-19 outbreak is going to make it even harder for companies to meet their original pledge timelines, but we will have to wait until August/September when the June 2020 quarterly updates appear to to find out how severe the impacts have been.
The unfortunate announcements from Metro Bank and Nationwide have raised some difficult questions about the big fintech stimulus programme. But other than the £100m that has been reclaimed, it’s probably too late to try and claw back grants that have been used to create new products and alliances.
It’s easy to take potshots at the CIF, but it undoubtedly spurred investment and innovation in the fintech market during the past year. Most of the grant winners pledged matching funds and have met those commitments, while many of those that applied for grants and didn’t get them have found investment too and brought forward their solutions.
A new pool
In the wake of the Nationwide announcement, BCR said on Friday it had agreed with the Treasury and RBS to pool the returned funds to open a grant scheme for new applicants.
“By the end of April, BCR will set out the consultation, expression of interest and application processes, eligibility criteria and other relevant information,” the funding body announced.
Potentially, this is a good opportunity to refine the scheme at a point when the need for more banking competition is becoming acute. One of the criticisms of the coronavirus business interruption loan scheme (CBILS) is that it's not getting money to businesses that need it.
Fintechs are known for being very agile and responsive to changing environments. If traditional banks are struggling to do a competent job of administering that process, this new pool be used to give fintechs an opportunity to come up with new mechanisms to deploy those funds more quickly.
But there is a caveat. If fintech developers are going to move into the business support market they will have a responsibility to taxpayers and struggling companies to follow through on pledges and timelines.
That will demand a more rigorous approach to due diligence than what we've seen so far. Coronavirus creates a greater sense of urgency. Companies that receive new CIF grants are going to need to demonstrate that the funds they receive are being used for the intended purposes rather than working capital.
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Nick Levine is a chartered accountant and journalist, with a particular interest in fintech. He was formerly the Advisory Lead at Deloitte’s Propel and the Head of Enterprise for ICAEW. His writing portfolio includes The Times, Wired and Real Business.