SME banking: Lessons from history


Louise Bowman
Published on:

Have banks finally learned not to hold their customers in contempt?


Although it is still just 10 years ago, the financial crisis often feels like another time. Never more so than when we are afforded a glimpse, Oz-like, behind the velvet curtain of the financial institutions at the centre of the maelstrom.

As financial journalists, we fell upon excruciating email exchanges thrown up by the SEC’s investigations into the CDO market in 2010. A Goldman Sachs employee’s: “Boy, that Timberwolf was one shitty deal!” seemed to strip away all the pretension from the firms we had spent so long hearing tell us about the risk characteristics of certain products. 

Endless correspondence describing deals they were actively selling as “crap” and “vomit” left the securitization emperors with no clothes when testifying in front of endless senate committees. They also gave us juicy fodder for stories covering the CDO market’s implosion.

This was all a long time ago now. It came flooding back to mind, however, when reading the leaked 361-page report written by Promontory Financial Group into RBS’s mistreatment of many small and medium-sized enterprises that had the misfortune to fall into the hands of its Global Restructuring Group (GRG) in the recession that followed the 2008 financial crisis.

Annex IV of the report details a memo written by a GRG team leader and widely circulated in at least one RBS regional office between 2009 and 2010. “Just hit budget!” screams the title. 

Tips for so doing involve using facility letters (“If they sign, they can’t complain”) and acceptance that the perfect deal doesn’t exist (if both parties are unhappy “then you probably have the balance right”). 

Euromoney has yet to meet a small business founder that was anything other than unhappy with their banks.  

If banks want to regain the trust of their SME clients and fend off growing competition from alternatives, they have a lot of work to do 

GRG staff were urged to “leverage upsides with high initial monthly fees” and have customers sign handover letters to confirm debt limits that didn’t entail new lending but did lock in immediate income. 

Managers working at GRG were not to feel bad about this, but they should keep a sharp lookout for ways to maximize RBS’s returns from its customers’ distress, because “missed opportunities will mean missed bonuses”.

The breath-taking contempt in which both CDO salesmen and small-business team leaders held their clients at this time is still shocking. The banking industry’s subsequent hair-shirted embrace of all things corporate, social and environmentally responsible has gone some way towards rehabilitation in the decade since these ill-conceived messages were written. 

In mid-February, Lloyds chief executive, Antonio Horta-Osório, was at pains to emphasize his bank’s change of approach following a critical speech by UK opposition leader Jeremy Corbyn. 

“The biggest thing I got from what [Corbyn] said is that he’s very focused on helping the real economy and this is exactly what Lloyds is all about,” said Horta-Osório. “We don’t do investment banking, we sold asset management, we sold international private banking. What we do is support families and businesses and communities in this country… I think we are completely aligned.” 

Such a statement would have been unthinkable in the heady days of 2007.

This approach to SME lending by the banking industry is long overdue. At the beginning of January, Nicky Morgan MP, chair of the Treasury Select Committee, announced a new inquiry looking at the lessons to be learned from RBS’s GRG and more broadly at the state of the market for SME finance. 

“The case of GRG has undermined the trust of small firms in banks, and highlighted the imbalanced and potentially exploitative relationship between banks and SMEs,” she stated. 

Not alone

RBS has become the lightning rod for this issue, but it is far from alone. HSBC attracted widespread criticism last year for its clumsy handling of many small business owners who found their accounts suddenly shuttered as part of its crackdown on financial crime.

In January, RBS chief executive Ross McEwan appeared in front of MPs and stated that he disagreed with the Promontory report’s finding that there was widespread inappropriate treatment of SMEs in GRG. 

He also disagreed that material financial distress was caused to any business, although the report’s authors found it befell one in six of the sample cases they reviewed in depth. 

They say that the first step to recovery is admitting your failings. 

So, McEwan deserves some credit for at last conceding that his own 2014 statement, shortly after taking over as chief executive, that GRG turned around the vast majority of businesses it worked with, turned out to be “not true”.

With immaculate timing, February also saw the publication of the British Business Bank’s investigation into UK small-business finance markets in 2017 and 2018. The research revealed that while aggregate flows of finance saw large double digit increases for many products, bank lending remained relatively flat. 

Data on loan application rates shows a continuing decline in the share of SMEs seeking new loans to 1.7% of smaller businesses, the lowest figure since the SME Finance Monitor began in 2011. 

Only 43% of UK SMEs are confident that they will get a bank loan when they apply, and attitudes against borrowing are becoming entrenched. Meanwhile, peer-to-peer business lending showed rapid growth, rising by just over 50% in 2017.

If banks want to regain the trust of their SME clients and fend off growing competition from alternatives, they have a lot of work to do. 

Another choice piece of advice given in the infamous ‘Just hit budget’ memo was that “sometimes you need to let customers hang themselves”. 

Today, banks still need to make sure that they are not the ones being led to the gallows.