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Is the Government’s new SME bank the last straw for high street business lenders?

Dear oh dear, it just keeps getting worse for bankers, doesn’t it? Already national pariahs for their role in the credit crunch, it now transpires that the Government has got so fed up with waiting for them to start lending to small businesses in order to kick start the economy that it has decided to launch its own bank. Desperate times, it seems, call for desperate measures.

Ironically it was announced by those other national pariahs, the Liberal Democrats; or specifically business secretary Vince Cable, who perhaps was desperate for an opportunity to shift public focus away from party leader Nick Clegg.

The Government has announced it is providing £1 billion worth of funding, with the liability for the loans to be carried on the balance sheet of this new company, rather than by the state.
It looks likely that the new bank – whatever it may be called, or promoted – may use the established high street banks for distribution, although full details will be announced in December.

Whatever their involvement however, is unlikely to do anything to detract from the damage which these the banks have inflicted on themselves and their industry as a whole in the eyes of the small business community since the credit crunch began. Owners of small businesses often regard themselves as righteous ordinary folk, who are sticking their necks out and doing their bit for themselves, their families and their communities, often against the odds. The banks, meanwhile, they see as fat cats who are creaming off huge profits largely on the back of Government bail outs, who are laughing all the way to… well, the bank.

They already have a bad name – the fact that the Government has had to step in to do what they should already have been doing will only make it worse, and opens up the potential for the development of a profound and fundamental mistrust between the two communities which may prove insurmoutable.

And if small business owners don’t trust the high street banks, well, they simply won’t use them. This therefore opens the way for a new breed of competitors in the market for funding, loans and clearing services for the UK’s 2.5 million small businesses. This includes not only the newly expanded Virgin Money operation, which will have a retail branch network soon, but also the Co-operative Bank, through the remutualised TSB brand which Lloyds has been forced to hive off, and new entrant Metrobank, which started trading in London a couple of years ago.

Perhaps less conventionally and more interestingly, it also paves the way for a new generation of online financial services providers, including things like crowd sourced funding providers. These organisations have the potential to be more innovative and flexible than the high street providers were willing and able to be, and may be more reflective of the dynamic new digital businesses that are now emerging. Quite whether the traditional players will be able to compete, or in the long term even survive, is surely open to question.