17th December 2020
Half of U.K. adults with debts have mental health issues and one in four people with a mental health problem are also in debt. The relationship is cyclical and much of it boils down to a sense of feeling in control of your money, of being financially resilient and capable. According to Martin Lewis’ Money and Mental Health Policy Institute, and numerous studies, the links between mental and financial health have become increasingly apparent in recent years.
The pandemic, with its impact on the way that we work and live, has emphasized just how interwoven mental and financial wellbeing are for all of us. The U.K.’s Financial Conduct Authority (FCA) has announced that financial resilience is at an all-time low with 12 million households now having low financial resilience. This is an increase of 20 percent since February and leaving millions having trouble withstanding financial knockbacks or a sudden loss of income.
According to new research from Asto the business finance and bookkeeping platform by Santander, the links between mental and financial health are present in the U.K.’s small and medium size enterprise (SME) business community. For small business owners, sole traders, and freelancers, issues around liquidity and cash flow concerns leave many struggling. Over two thirds do not feel in control of their money, with a third specifically saying that they feel anxious and stressed when it comes to their business finances. Furthermore, when they face financial pressures, over half feel stressed or uncertain, compared to just 11 percent who feel optimistic.
Perhaps this is no surprise given the impact of the pandemic on the global economy, with small businesses feeling the impact of business interruption the hardest. Research from MarketFinance, found that most small business owners believe they will not survive into 2021, with only a quarter believing they will make it, a shocking statistic. Late payments, low savings, and poor cash flow are their main concerns – with the data showing almost half of the businesses surveyed are still waiting to be paid for work completed in first lockdown, and almost half are withholding payments to suppliers themselves because of cash flow fears.
Nucleus Commercial Finance has revealed that almost a quarter of U.K. SMEs have little to no savings, rising to almost half of sole traders surveyed. Their survey suggests that the businesses with savings have spent around £72,000 on average to stay afloat already, with this increasing to £149,101 in medium size businesses. They suggest that SMEs will need to spend the same again, at minimum, in order to make it back to pre-Covid levels of business.
Fears of future economic shocks are understandable. Asto’s Cash Flow Revolution Report makes the connection between issues such as cash flow and late payments with the wellbeing of business owners noting that over half of business owners define “good financial health” as feeling in control of their finances. Control is more important to business owners surveyed than turning a profit or paying their salaries. The report also notes that the level to which freelancers and business owners embrace technology is a key factor in their confidence and sense of control.
Asto’s findings demonstrate that British businesses are increasingly open to using fintech to support their business needs. Four in five running a small business now say they would use digital tools, including fintech apps, digital banks, accounting software and alternative finance. This is driven by the desire for financial control in the wake of Covid-19, with most of the small number of business owners who already use digital tools saying it’s because they make them feel in control or organised.
Business owners say the key reasons for adopting fintech tools are things like having greater visibility of their cash flow and the time-saving features around automated invoicing, accounting and financial admin. These are simple features that are just the tip of the innovation that fintech can deliver to businesses, however there is much work to be done to address this demand by the fintech sector.
Over half of the U.K. SMEs surveyed told Asto that they find the information shared by banks and fintechs confusing. Less than two in five said they felt confident about where to find or how to choose the right fintech tools for their business, leaving 62 percent unsure of where even to start their search – these statistics echo the SME lending market years ago, prior to the U.K.’s fintech revolution.
Overall, it is a concerning set of statistics, pointing out a considerable, untapped opportunity for those working in digital financial services. It is also particularly pertinent in light of the UK Fintech Review re-launched in July and led by Ron Kalifia
The review was set up to examine what is necessary to increase mainstream adoption of technology solutions and enhance the resilience of the UK fintech sector. It focuses on the themes of skills and talent, investment, national connectivity, policy, and international attractiveness. And following Covid-19, which has caused exponential awareness and change in the adoption of digital financial services, it comes at a pivotal moment in the UK’s pandemic response.
At the review’s first meeting of the governance board, John Glen economic secretary to the Treasury and City minister, said that technology has a vital role to play in the U.K.’s COVID-19 economic recovery, emphasising the need to create a financial services ecosystem that is ‘sustainable, inclusive and world-leading’.
With this spirit in mind, it seems wise that those taking part in the Review should pay attention to the growing data around the links between the liquidity of SMEs, promotion of fintech, and money and mental health. After all, these factors are arguably crucial to the very concept of resilience.
At the heart of the review is the ambition to deliver government and private sector policy to further incentivize and drive mainstream adoption of fintech. It’s fair to say that you can’t get more mainstream than the U.K.’s SME community. The Federation of Small Businesses (FSB) estimates that there were almost six million small businesses in the U.K. at the start of 2020, accounting for three fifths of employment (nearly 17 million jobs) and around half of turnover in the U.K. private sector.
SME businesses are now open to fintech adoption in a way that hasn’t been seen before. They want the insight and ease, the speed and innovation, provided by digital banks, automated accounting, digital currencies and alternative finance.
Joanna Morris, head of insight at Hitachi Business Capital Finance, commented, “The pressure for businesses to embrace technology continues to mount, as those that have already reaped the benefits of their competitive advantage. The case for investing in a business’ tech agility has never been stronger.”
Nicolette Maury, CEO of Asto, concurs, having seen the impact that the right technology can have on SMEs from her time at eBay, Intuit and now Asto. She notes the vital role that digital financial tools can – and must – play in the future for the small business sector, pointing out that recovery is about long-term strategy and investment, looking beyond the immediate crisis and into the future.
Maury says, “There is currently a lot of short-term support to help business owners, provided both by the government and initiatives from banks and fintechs, but what we need next is more innovation and investment in technology that can truly support the people running businesses in the U.K. in the long-term.
“Fintech companies and banks can lead in this, providing digital-first solutions to the biggest challenges that business owners face and helping foster a sustainable ecosystem of digital tools, communities and access to finance.
“This level of innovation can help ensure that British businesses continue to run and grow – and that the business community as a whole can thrive.”
The short-term support, of course, refers to schemes like the Coronavirus Business Interuption Loans (CBILs) and Bouce Backs Loans BBLs that have been lifelines to many SMEs across the UK. Fintech providers like Starling Bank, OakNorth, and Funding Circle have become well-known names – amongst many – thanks to their position as CBILs and BBLs lenders. In some instances, these schemes may also be the first introduction that some small business owners and sole traders have to digital financial tools.
The British Business Bank, which is responsible for organising the CBILS, BBLS and other government emergency funding schemes, said in their annual report for 2020, “While diverse types of finance and finance providers [including fintechs] have been an important part of delivering emergency schemes during the crisis, they will be even more important in the recovery, when the U.K.’s smaller businesses will still need to be served by a healthy, competitive and diverse finance market.”
The problem is that the emerging business community consensus around CBILs and BBLs is that it could have a long-term negative impact on British fintech.
Katrin Herrling, founder and CEO of business funding marketplace Funding Xchange, says, “CBILs and BBLs have slowed down the growth of the fintech sector significantly, the digital processes that existed before the crisis that were working well have been entirely disrupted – they’ve been unplugged – there’s no doubt that the government needed to step in, but the way it’s been executed has undermined fintech fundamentally.”
Moreover, whilst the first wave of CBILs was messy, excluding the digital challengers. Their subsequent inclusion has had wider ramifications for the fintech industry in terms of their reputation and potential harm. The schemes have also choked the alternative finance space.
Herrling adds, “Many of the fintechs, particularly the challenger banks, have been sidelined by this entire thing. If you weren’t accredited and were therefore unable to provide funding, then your customers weren’t eligible for bank funding.
“We’ve seen on the Funding Xchange platform an increase in customers coming from challenger banks looking for a loan. Before the crisis, it was about 15 percent of customers and now it’s upwards of 40 percent. That’s because the large banks are accredited, so if you weren’t banking with the main banks then you largely didn’t have access to BBLs.
“The damage that this is doing to the reputation of some of the fintechs is not insignificant. It’s ensured that SMEs are much better off being with one of the traditional high street banks.”
Since the announcement of the second national lockdown, 84 percent of businesses have said they will be applying for CBILS loans.
Anil Stocker, chief executive officer of MarketFinance, adds, “The stop-start government announcements on lockdowns haven’t helped U.K. businesses, however, they continue to fight on and will, naturally, require more funds to bolster them through a tricky winter period.
“Looking ahead, ultimately, it will be the private sector which will enable the Chancellor to get the country’s finances back under control, so business leaders will be looking for some pro-growth, pro-enterprise stimulus measures in time to come.”
One could argue that some issues that have historically held fintech lenders back, such as a lack of access to cheap funding, are now being scrutinised. A fresh flag has been raised over market competition, with the all-party parliamentary group for challenger banks and building societies recently concluding that it is time to break up the big high street banks.
It is also fair to say that the pandemic has made more U.K. SMEs aware of the benefits of digital tools, though many may not have been able to access or benefit from them because of the nature of the government backed loans, however, while alternative lending may have been stifled, or even choked by the CBILs and BBLs schemes, some trends, like Open Finance, have been accelerated exponentially.
“We’ve seen a leap frog in terms of Open Banking,” says Herrling “Lenders are now mandating access to open banking data and businesses are agreeing to share that data in order to gain funding. The pandemic has overcome a huge amount of hesitancy and we are now beginning to see the value-add services becoming feasible. In the long-term the potential there is humongous.”
A final essential trend that has accelerated fintech is that freelancers and small business owners are engaging with their finances in a more meaningful way. Small business lenders and fintechs can easily see how customers have a growing desire for more robust solutions and skills to better run their finances. The challenge now is to harness this proactive interest in, and desire for, digital solutions.
As Maury says,“Business owners, freelancers and sole traders are the backbone of British industry, and they need help now more than ever, particularly when it comes to digital tools that fully address the needs of the business community. Digital tools are key to supporting the U.K.’s entrepreneurial zeal and international competitiveness.”
The U.K. Fintech Review is an important and timely piece of work. But if the insights from fintech lenders like Asto, MarketFinance and Funding Xchange indicate anything, it is that, to encourage mainstream adoption of fintech and bolster business resilience, we must collectively assess the holistic needs of SMEs, including their relationship with their money.
We must unsure we better understand the interaction between financial and mental health and how we can better and more responsibly drive the adoption of fintech and digital finance to ensure a greater resilience of British industry.
COVID-19 has put many British business on life support systems, Brexit could finish them off. Fintech is a game changer for U.K. SMEs and can play a greater and more significant role in the acceleration of the country’s economic success. The U.K. Fintech Review is a call to action for the government to activate fintech to help save U.K. SMEs and drive the post-COVID-19 and Brexit recovery.
Fintech offers many opportunities to help British SMEs sustain themselves in the short-term while laying the foundations to go on and successfully create longer term economic growth and prosperity, but will require more than a nudge from the government. Next to the expansion of the Bank of England’s balance sheet, and right sizing financial services regulation for crypto and digital assets and sustainable finance and investment, fintech is one of the few tools in the government’s limited arsenal that can make a difference to SMEs, now.
This article was published in Forbes 17th December 2020