Friday, August 30, 2013

(Business) Nationwide: Nationwide‘s delay in moving into SME loan market wiser than you think

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,
[2] Ibid
[3] Ibid
[5] M. Flanagan, 2013, Comment: Mutual recriminations over Nationwide,

No comments:

Post a Comment


Related Posts Plugin for WordPress, Blogger...