Dr Louise Beaumont, head of public affairs and marketing at GLI Finance, argues that FinTech could help boost the UK’s productivity.
Productivity in the UK is in a downward spiral.
Output per hour lags behind all other leading G7 economies with recent ONS findings indicating the gap is now the largest it has been since records began.
With such startling figures, the issue is increasingly becoming a headache for the Government, coming to the forefront during the Budget in March when the Office of Budget Responsibility (OBR) revised down its forecast for already sluggish productivity growth by 0.2% points from now until 2020.
Improving productivity is not a simple ask and economists are in agreement that there is no silver bullet. Technological innovation, investment in skills and wages are all rightly identified as contributing factors.
However, one area that has hitherto received less attention as a factor in the UK’s productivity puzzle is that of lending, or lack of, to the right businesses.
Analysis conducted by the IMF in February this year highlighted that part of the problem could be because banks are failing to shift enough capital from inefficient businesses to those with clear growth potential – such as startups and SMEs.
These types of businesses are being starved of funding with IMF estimates concluding lack of credit could be responsible for the 0.4% decline in UK productivity.
The IMF estimates chime with the systemic funding crisis faced by SMEs that has set in since the financial crash of 2008. UK SMEs have had £5.7m withdrawn a day in small business overdrafts since 2011, which has cut available credit by £8.4bn, representing a significant drop of 40% by 2015.
In addition, research from Funding Options, an alternative finance aggregator platform, last year highlighted that slower growth as a result of SMEs being unable to borrow could have cost the UK economy as much as £2.9bn in potential turnover. Crucially SMEs with access to higher levels of borrowing grew their turnover on average by 15.7% over the last five years, compared with 14% growth for those with no borrowing.
FinTech holds the solution
It is clear that banks are not going to start ramping up lending anytime soon. Without such a step change in lending, how can the gap be plugged?
The answer is the UK’s growing alternative finance sector that is helping to cement London and the UK as the global leader in FinTech.
This can only be achieved, however, through increasing awareness levels of alternative finance amongst SMEs and startups in the first place so that rejection from a bank does not limit the potential for growth.
A report produced jointly last year by the University of Cambridge and GLI Finance highlighted that raising awareness levels amongst businesses could add up to £20bn to the UK economy by 2020.
Awareness cannot come soon enough. Whilst some SMEs have been able to access alternative finance, a great many have not, as evidenced in additional research from Funding Options in 2015 that found up to 21% of SMEs had no working knowledge of alternative finance whatsoever.
Tackling business awareness of alternative finance needs to be front of mind within government as it attempts to tackle the UK’s lagging productivity.
Significant progress will be made through the implementation of the Bank Referral Scheme, ensuring that banks refer SMEs to alternative finance providers if they are unable to meet their needs.
The proposals put forward last month by the Competition & Markets Authority for a financial services comparison service will, if implemented, make it easier for SMEs to shop around and unlock credit.
Government and regulators must build on the momentum to date in order to drive the effective behavioural change needed amongst SMEs to prevent the over-reliance on traditional banks as the default option when seeking credit.
The UK’s productivity problem is set to increasingly dominate economic and political discourse in the months and years to come.
While there is no silver bullet, addressing SME access to finance, via alternative finance, could make a real difference and the benefits would be felt by both businesses and government alike.