“A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain.” This quote is often credited to Mark Twain, although there is plenty of dispute about the attribution. What is a known fact is that it dates back to at least 1905 and demonstrates that bankers had a questionable image long before the 2008 financial crisis. It also gives a pointer to the fact that the root cause of the difficulties facing modern SMEs who need financing also dates far further back in time.
Historically, banks were much smaller and run on the basis of human judgement
For most of history, the extent to which banks could expand was curtailed by the practical realities of doing business without modern transport, communication or digital currencies. This meant that even the biggest banks were tiny in comparison with today’s global banking giants and it also meant that decisions were taken on the basis of human judgement (and political considerations) rather than being delegated to automated systems.
In the 20th century the nature of banking began to change
The 20th century was the century when technology developed at an unprecedented rate and some banks took full advantage of it to grow their business. The move to digital communications and digital currency changed the face of banking completely since it removed geographical restrictions and eliminated the challenges of moving physical currency from one place to another. Banking, or more specifically, the ease of getting credit, played a crucial role in the economically-vibrant years of the 1980s – and in the subsequent bust. Had lessons been properly learned from this, it’s an open question whether or not the financial crisis of 2008 would ever have happened, but it did and this time regulators stepped in.
Lenders begin to operate to a new set of rules
By 2008 the phrase “too big to fail” was appearing regularly in the media and, while some disputed it, (and pointed to how the Lehman Brothers was allowed to fail), governments around the world, including the UK, stepped in to bail out failing banks. These bail outs were accompanied by controversy and conditions. In very simple terms, post 2008, banks have come under increasing pressure to ensure that they only lend to people and organisations who can actually manage the credit. In addition to backing up these obligations with regulations, the old Financial Services Authority was replaced by a combination of the Financial Conduct Authority and the Prudential Regulation Authority, the very names of which emphasise the importance of appropriate and fiscally-responsible behaviour.
Regulatory enforcement is automated
These days applying for credit is often a largely, or completely, automated process. Apply online and a computer will evaluate your application in the light of cold, hard, provable facts and come up with a decision. Apply offline and in all probability your form will simply be digitised and go through the same process. This means that even though, in theory, regulatory authorities may allow banks a certain level of scope for human judgement in cases where people and companies fall outside standardised means of demonstrating creditworthiness, such as credit scores, systems automation makes it less likely that this judgement will be used. Even if you do manage to get the decision reviewed, you have to face the reality that a human may be very unwilling to put themselves on the line by over-ruling the computer’s decision. This is the main reason why it can be so difficult for SMEs to get credit. By definition, smaller companies are less likely to have access to high levels of collateral to provide the banks with security and many of them are younger companies without extensive financial histories. Because of all of this, it is hardly surprising that SMEs are now starting to give up on the high street lenders and look for alternative sources of credit.
Should you need business financial help, companies like ourselves are often the human face of financing and can in most cases offer you the help you require.
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