As an entrepreneur myself, I’m acutely aware that behind every small company that’s suffering because of the coronavirus emergency is a business owner, or team, feeling the stress very personally. Some will have poured their savings, not to mention, their heart and soul, into their businesses. For many, their company is more than their livelihood; it’s their life.
That’s why, at Starling, we take very seriously our responsibility as an accredited lender under the government’s new Bounce Back Loan Scheme (BBLS) and the Coronavirus Business Interruption Loan Scheme (CBILS). Both initiatives have been designed to provide a lifeline for small and medium-sized enterprises (SMEs) that have been hit hard by the current crisis.
We want to help these companies and we don’t need any persuading that it is the right thing to do.
Meeting the challenge
At the same time, we were acutely aware when we submitted our application to the British Business Bank (BBB) to become an accredited lender under these schemes, that being successful would represent a double-edged sword. Some previously accredited as BBB lenders decided they didn’t want to be part of the new CBIL and BBL schemes. So they made their excuses and opted out. Possibly, they felt that the amount of work involved and the level of public scrutiny meant it would just not be worth their while.
We, on the other hand, decided without hesitation to become lenders under these schemes, fully aware of the advantages and disadvantages. It wasn’t a difficult decision. As a bank for SMEs, we had to do it.
We’re very aware that expectations of us are high. People expect us to be good at this because, as a purely digital bank, we have a reputation for building and launching products quickly. But this is different. Making a product available to almost the entire customer base on the day of launch is not what we normally do. We’re more accustomed to starting small, launching new products and services in beta and then listening to customer feedback before building out something bigger.
The urgency of the current situation means that we have to launch at scale practically from a standing start. So we want to be fully upfront about this: we may need to make adjustments as we go. We hope our customers and the wider community will understand this.
Making a leap
Under the BBLS, lenders are offered a 100% government-backed guarantee. As things stand, the intention with BBLS loans is that they are repaid. They are not grants. But standard lending criteria – the ones that require a lender to ascertain whether a business can afford to pay back a loan – have been dropped.
We’re told by the Treasury and the British Business Bank that the expediency of getting these loans out to the people who urgently need them is more important than checking their ability to repay. This effectively means that any small business owner that has not got a track record for fraud should be approved for a loan.
This is a huge cultural and intellectual leap for bankers, who’ve been conditioned to believe that you should only lend if you have evidence that the borrower is capable of repayment and to do otherwise is irresponsible.
In addition, we’ve been told that, right now in May 2020, this new approach is in the best interests of the country. We agree. This is the right thing to do. Many small businesses need money and they need it now.
But let’s not forget this in a year or two’s time, or whenever the defaults start to happen. It’s important that, as a nation, we go into this with our eyes wide open.
Understanding our customers’ business
Starling currently has around 150,000 small business customer accounts. Yesterday nearly 1,000 sole traders applied for accounts with us. We’ve been built for flexibility and despite doing all the regulatory checks it’s relatively easy to open an account with us.
We expect to receive a disproportionate amount of BBLS loan applications from sole traders that do not have a full set of company records. To assist these customers, and ourselves, we’re taking additional precautions.
For Starling to ensure that sole traders are trading as businesses and to satisfy Anti-Money Laundering (AML) and Know Your Customer (KYC) regulations, we are asking for more detail from their 2018/2019 tax return and for the very newest sole traders, who started their business since April 2019, we are asking them to complete their 2019/2020 tax return or to provide a VAT number.
Some may regard this as an unwelcome burden at a time when they’re already under stress. We get this, but we believe our approach is really beneficial. Unless you, as a small business owner, properly understand your financial position, you cannot, with your hand on your heart, make the declarations about your income that the government requires you to make on the BBLS forms.
Getting to know our customers
I’m tremendously proud that small businesses and sole traders are flocking to Starling. We’re a very small, highly-automated bank and while we will dedicate all our software engineering skills to this problem, we ask that you bear with us while we gear up to deliver these loans at volume. We have a reputation for operational excellence, but I cannot promise that it will be 100% problem-free.
The ’safe’ approach would be to do nothing. The brave approach, the difficult one, is to take on the challenge of getting money out to small business owners who need it as quickly as possible. That’s what we’ve decided to do.
Over the next couple of days, I expect we may see comments on social media from applicants frustrated that we are performing fraud checks on them or upset that we have declined their loan application. We’re prepared for this. We accept that in a few cases we may make some mistakes and decline applications that we could have approved. But in the vast majority of cases, when we say ’no’ to a BBLS loan, it will be because there are genuine issues with the application.
BBLS lending has been set up to be as light-touch as possible. But we do still need to conduct fraud checks, principally KYC and AML checks.
The fact that we are a bank focused on serving smaller businesses, means that for us to get £100m out of the door in BBLS loans will be a similar amount of work as it might be for a bigger bank to lend £1bn, for the simple reason that they are likely to be making bigger loans. The work lies in the number of transactions, not the overall value. And whatever the value of the loans, we need to be as confident as we can of who we are lending to.
Keeping our side of the bargain
I’ve heard a lot in the last week about the ’moral hazard’ of enabling lenders to advance money to SMEs under BBLS without risk to themselves because the loans carry a 100% guarantee. This is based on a misconception. The government is not ’giving’ us this money to lend. We’re providing the cash and getting a guarantee from the government via the British Business Bank that it will be repaid. Our side of the bargain is making sure that we are applying the rules properly when we agree to lend.
The guarantee for these loans will ultimately come from tax-payer money; your money. Every £1 that goes to a fraudster as a BBLS loan is one less £1 for the NHS. This is where the moral hazard really lies.
We do not, in two years’ time, want to look back on this period as one where we all abdicated all reason and left everybody out of pocket. Instead, we hope this will be seen as a key moment in history when the banking and financial technology industries pulled together with the Treasury and the BBB to save millions of small, but great British businesses.
Founder and Chief Executive of Starling Bank