Where Have All the Bank Managers Gone?
Is the traditional credit broker role in danger of extinction? I ask this question against the backdrop of the increasing use of internet portals by consumers to process transactional borrowing requests. Vehicle and equipment finance, short term cash-flow funding and residential property investment can all be applied for simply by putting a bunch of information into an online portal.
The last 20 years has seen a massive growth in sources of business finance. The 12 Challenger Banks which have opened on the back of the 2012 Financial Services Act are open for business. The Alternative Finance Market. Which includes crowdfunding, equity crowdfunding, revenue based financing, cryptocurrency and others. With so much choice and in many cases, ease of access via the internet, you might think this spell the demise of the effectiveness of the credit broker as a financial intermediary.
Where does the UK based Small and Medium Sized Enterprise (SME) business owner seek advice when formulating a lending proposal?
When I started in Commercial Banking in the 1990’s. Business owners would have gone direct to their Bank and discussed their business plan with their local Manager.
That pathway has been curtailed by a variety of factors. Firstly, there has been a massive reduction in the local bank branch networks. Since 2015 5,000 branches have been closed or earmarked for closure. This makes it more difficult to locate the right person to speak to about a complex lending proposal. Cost to serve considerations have persuaded lenders to set a higher bar for the relationship manager services. A large proportion of SME’s are now managed from central offices. Particularly if they are predominantly liquid with minimal debt on their balance sheet.
Frequent Relationship Manager changes has always been an issue for business owners. This is now magnified by the career pattern of banking contacts moving frequently both internally and to new employers.
A generation of bankers who worked through the full hierarchy of back-office functions. Who had a holistic view of the banking model and a strong credit apprenticeship are reaching retirement. As Banks have withdrawn from local markets there has been a breakdown of local professional networks. This makes it increasingly difficult for accountants and other financial advisers to make personal introductions to Bankers or to keep pace with changes to the credit appetite of individual lenders.
We are now seeing the beginning of a split in the traditional credit broking market.
The changes in the banking sector have led to the growth in specialist Debt Advisory businesses and boutique Corporate Finance businesses. These organisations are providing specialist debt and equity raising advice, similar to that delivered by the corporate finance departments of accountancy firms and targeting the mid-market. Navigating the debt markets is becoming increasingly difficult, and companies like ours are now seeing a demand from SME’s for a more consultative approach to managing their funding requirements.
The Financial Conduct Authority are also quite rightly looking for a higher standards of client care and advice from providers. This is to ensure business owners can make informed decisions about product choices.
Lenders are increasingly seeking a higher level of financial analysis and professional presentation of funding proposals from prospective clients. Banks now expect their customers to have an experienced corporate finance adviser. To help them create a persuasive lending case, which can then be presented to underwriters. Banks are reporting that up to a third of their new business cases are coming from credit brokers. It is becoming clear that SME’s are also now searching for advisers who can offer the professional packaging of a proposal, a well-run competitive tender process, assistance with negotiating the best terms and close management of the funding process through to drawdown.
A new breed of credit adviser is therefore emerging.
One that will bring that consultative approach as well as financial modelling and engineering expertise to ambitious businesses. The best performers in this market can secure the most competitive pricing for their client, and therefore offer a very high return on investment. The payment of fees is often contingent on successful conclusion of key stages in the process. This means the credit broker is sharing in the success of their client. Older heads will reflect that this advisory role used to be the province of senior relationship staff in the Clearing Banks. Interestingly if one scans the websites of this new breed of debt adviser then personal profiles will often betray that career background, alongside other team members with accounting and equity investment backgrounds.
The answer to our question ‘Where Have All the Bank Managers Gone?’ is that they have been phased out or are in boutique debt advisory firms like Lily Head Finance.
This article was written by Martin How, the Managing Director of Lily Head Finance . It was first published in the December 2023 edition of The Dentist Magazine.
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