Nationwide had planned to enter
the SME market and start making loans to small businesses across the UK as soon
as next year but suddenly decided to delay their entry until two years later
than planned. On first look, this
decision is strange as Nationwide already compete with major commercial banks
so it would represent a natural transition if they were to starting lending to
small business but a considered look at the SME market would make Nationwide’s
delay a wise decision.
There are number of reason why
Nationwide have decided delay but the most prominent among them would be the insistence
of regulators to increase the amount of capital the Building society holds in
reserve. One of the key features of the financial crisis of 2007-08 was how
undercapitalized high street banks coupled with obscene levels of debt which
still effect major banks, including Nationwide, to the present day. Still
reeling from the fallout of the last crisis, regulators at the Bank of England
are prepared to stand firm and hold fast to their capital demands despite criticism
from business and government ministers looking to start another lending bonanza[1]
A second reason why Nationwide
may be a little apprehensive about entering the SME banking market is the very
nature and structure of the market itself. The UK SME market is run by five major banks that
control 90% of the market so this leaves very little room for Nationwide to
work with off the bat[2].
While it may be argued that there may be a need for competition, this brings up
another problem why Nationwide are less than gung-ho about entering the SME banking
market.
According to EEF, it appears
that small business (Nationwide’s prospective customers), despite the relative
lack of real competition in the market, as they “were reporting an improvement
in the availability of borrowing and a drop in the cost of securing loans”[3].
Another reason why Nationwide delayed their entry into the SME lending market
is they have little knowledge about very risky market given that a significant
number of SME ‘s fail. To illustrate, would you gung-ho about investing money
in something that fails 20% of the time in its first years or 50% in the next
three? Nationwide, wisely, clearly aren’t[4].
Building Societies like Nationwide are by design conservative organizations so
forays into markets as risky as the SME banking market are not done on a whim[5].
However, Nationwide might have been encourage by data that shows that the rate
of business failure has been in decline since the crisis meaning SME have
mostly weathered storm coupled with people starting new businesses to replace
those who were wiped by the credit crunch. Also with government almost sounding
a rallying everybody with an inclination to invest in small business,
Nationwide might have been tempted to try their hand.
But even Nationwide to take the
plunge into the SME banking market, there is no promise that Nationwide would
any more lenient than high street are towards SME’s. With Nationwide being risk
averse by nature of their business model, the barriers to funding are likely to
be rigid and since they suffer from the same capital shortfalls (though not as
large) as other major high street banks, pumping money into SME’s do not look
an attractive prospect.
In sum, Nationwide may end up
taking the plunge but not without their feet in an ever increasing tide-happy
pool.
[1] P.
Cunliffe, 2013, Nationwide delays SME Lending Plans, http://www.express.co.uk/finance/city/425043/Nationwide-delays-SME-lending-plans
[2]
Ibid
[3]
Ibid
[4]A.Stount, 2012, The UK Start Up Economy: Nov 2012,
[5] M.
Flanagan, 2013, Comment: Mutual recriminations over Nationwide, http://www.scotsman.com/business/management/comment-mutual-recriminations-over-nationwide-1-3063255
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