St State of Sm Small Business Le Lending: US US and UK UK - - PowerPoint PPT Presentation
St State of Sm Small Business Le Lending: US US and UK UK Karen Gordon M Mills Senior Fellow, Harvard Business School & Harvard Kennedy School Former Administrator of the U.S. Small Business Administration and Member of President
Karen Gordon M Mills Senior Fellow, Harvard Business School & Harvard Kennedy School Former Administrator of the U.S. Small Business Administration and Member of President Barack Obama’s Cabinet
OOC OOCTOB OBER 2015
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DR DRAFT DR DRAFT WHY WORRY ABOUT ACCESS TO CREDIT FOR SMALL BUSINESSES?
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US S Small Businesses
Main Street (~4M) High Growth (~200K) Supply Chain (~1M)
~28 Million
Sole Proprietors (~22M) Employers* (5.7M)
UK S Small B Businesses
~5.2 Million
Sole Proprietors (~3.3M) Employers (~1.9M)
§ US: small firms produce half of private jobs, two-thirds of net job creation § UK: small firms account for half of private jobs, 65% of net job creation
Note: Remaining 500,000 business are Non-Supplier Businesses in the Traded Sector
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DR DRAFT DR DRAFT US: SMALL FIRMS HIT HARDEST IN CRISIS -- 60% OF JOB LOSSES
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Source: Bureau of Labor Statistics, Business Dynamics Statistics (latest as of 4Q14). Chart shows the change in the number of charges by firm size, specifically “small businesses (firms with fewer than 500 employees) and large businesses (firms with more than 500 employees).
Qu Quarterly Net Job Ch Change by Fi Firm Size (‘ (‘000)
2000
1500
1000
500 500 500 1000 1000 1500 1500 93 93 94 94 95 95 96 96 97 97 98 98 99 99 00 00 01 01 02 02 03 03 04 04 05 05 06 06 07 07 08 08 09 09 10 10 11 11 12 12 13 13 14 14 Sm Small (<500 Employees) Me Medium (500-999 999 Employees) La Large (1000+ Employees)
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DR DRAFT DR DRAFT UK: JOB CREATION AT SMALL FIRMS ALSO HIT HARD DURING CRISIS
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Source: Federation of Small Businesses (October 2015)
Pe Percentage of Small Businesses Reporting Net Change in Employment, Last 3 Months
10%
8%
6%
4%
2% 0% 0% 2% 2% 4% 4% 6% 6% 8% 8% 10% 10% 1Q 1Q10 10 3Q 3Q10 10 1Q 1Q11 11 3Q 3Q11 11 1Q 1Q12 12 3Q 3Q12 12 1Q 1Q13 13 3Q 3Q13 13 1Q 1Q14 14 3Q 3Q14 14 1Q 1Q15 15 3Q 3Q15 15
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WORKED FOR PRESIDENT OBAMA AS HEAD OF SMALL BUSINESS ADMINISTRATION (2009-2013)
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DR DRAFT DR DRAFT RECORD SBA LOANS HAVE HELPED, BUT LIMITED MARKET REACH
6 Source: Small Business Administration. 7(a) and 504 loan volume since Fiscal Year 2008. As of May 2014.
§ SBA represents <10% of market, limiting broader market impact
$25. $25.0 $18. $18.0 $22. $22.0 $30.5 $30.3 $30.1 $15 $15 $20 $20 $25 $25 $30 $30 $35 $35 FY FY08 FY FY09 FY FY10 FY FY11 FY FY12 FY FY13
SB SBA lending up two-th thirds from th the crisis, bringing back 1,000 lenders, helped by new legislation and an agency-wide initiative to cut paperwork
Loan Volume ($ billions)
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US: CREDIT FROZE DURING CRISIS, SLOW TO RECOVER FOR SMALL FIRMS
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Source: Federal Reserve, “Senior Loan Officer Survey” as of July 2015.
Ne Net Tightening Ne Net Loosening Per ercen entage e of
Bankers Rep eporting Net et Tig ightenin ing or
Loosening of
Loan Con
20%
10% 0% 0% 10% 10% 20% 20% 30% 30% 40% 40% 50% 50% 60% 60% 70% 70% 80% 80% 200 2007 2008 2008 2009 2009 2010 2010 2011 2011 2012 2012 2013 2013 2014 2014 2015 2015
Ti Tightening Standards (Large Businesses) Ti Tightening Standards (Small Businesses)
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DR DRAFT DR DRAFT US: BANK LOANS TO SMALL BUSINESSES FELL DRAMATICALLY
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Source: Federal Deposit Insurance Corporation, Call Report Data. As of January 2015
Sm Small Business Loan Assets on Balance Sh Sheets ($ Billions) 100 100 200 200 300 300 400 400 500 500 600 600 700 700 800 800 02 02 03 03 04 04 05 05 06 06 07 07 08 08 09 09 10 10 11 11 12 12 13 13 14 14 15 15
§ Loans fell 18% during and after crisis, only recently began growing again
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UK: BANK LENDING TO SMALL FIRMS FROZE IN CRISIS, YET TO RECOVER
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Source BIS: Monthly BIS survey and Bank calculations. Lending by four UK lenders to enterprises with annual bank account debit turnover less than £25 million. Survey ended December 2012. Source BOE: Lending by UK monetary financial institutions to UK SMEs with annual debit account turnover on the main business account less than £25 million. Data is through February 2014. BBA Source: Lending by a BBA panel of lenders to SMEs in Great Britain. SMEs are defined as businesses with turnover up to £25 million. Data is through December 2013
5 10 15 20 Mar 08 Jun 08 Sep 08 Dec 08 Mar 09 Jun 09 Sep 09 Dec 09 Mar 10 Jun 10 Sep 10 Dec 10 Mar 11 Jun 11 Sep 11 Dec 11 Mar 12 Jun 12 Sep 12 Dec 12 Mar 13 Jun 13 Sep 13 Dec 13 Business, Innovation & Skills Dept Bank of England British Bankers' Assoc Per ercen entage e Changes es in Small Busines ess Len ending on a Yea ear Earlier er
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DR DRAFT DR DRAFT US: STRUCTURAL PROBLEMS ALSO PLAGUE LOAN MARKET
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Source: Federal Deposit Insurance Corporation, Call Report Data. As of January 2015. * Per reports from the FDIC Acting Chairman Martin Gruenberg and a December 2012 survey of small business finances conducted by the Federal Reserve Bank of Atlanta
14 12 9 8 7 7 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000 2 4 6 8 10 12 14 16 1985 1990 1995 2000 2005 2010 Number ¡of ¡Community ¡Banks Average ¡Bank ¡Assets
Average Bank Assets ($ billions)
Nu Number of f Community Banks (Left ft Axis) vs. Average Bank Assets (Right Axis)
§ Small banks supply about 40% of SME loans, but being consolidated
Number of Community Banks
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DR DRAFT DR DRAFT UK: LENDING TO SMALL FIRMS REMAINS HIGHLY CONCENTRATED
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Source: 1999 figures from CC, 2013 figures from Charterhouse release Q1 2013. Percentages may not sum to 100 because of rounding.
Ll Lloyds 23% 23% RB RBS 29% 29% Ba Barclays 22% 22% HS HSBC 11% 11% Sa Santander 11% 11% Ot Othe hers 4% 4% Ll Lloyds 26% 26% RB RBS 26% 26% Ba Barclays 19% 19% HS HSBC 18% 18% Sa Santander 4% 4% Ot Othe hers 7% 7%
Volume Shares of Small Business Loans in England and Wales, 1999 vs. 2013
1999 2013
§ About 90% of small firm loans are provided by largest banks in UK
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DR DRAFT DR DRAFT US AND UK ONLINE LENDING GROWING RAPIDLY
Source: Company data, Morgan Stanley research estimates.
5 10 10 15 15 20 20 25 25 30 30 35 35 40 40 45 45 50 50 20 2014 14 2020E 2020E 5 10 10 15 15 20 20 25 25 30 30 35 35 40 40 45 45 50 50 20 2014 14 2020E 2020E US Marketplace UK Marketplace On Online lending es estimated ed to be e 16% 16% of f is issuance by by 2020 vs. 3% to today Le Lending to Small Businesses, 2014 vs. 2020 Estimates, , Billions +4 +47% 7% an annual al gr growth +55% +55% an annual al gr growth £9b £9bn $47 47bn
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US: THREE INITIAL MODELS DEVELOPED – BUT LINES ARE NOW BLURRING
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Source: Authors’ analysis
Borrower-Driven Broker Marketplaces
Connect small business borrowers to a series of lenders that are part of their
work with conventional lenders like big and small banks, SBA lenders as well as alternative lenders.
Institutional-Driven P2P Marketplaces
Institutional marketplaces, sometimes referred to as “peer to peer” lenders, were initially consumer-focused. Now, greater emphasis on small businesses.
Balance Sheet Lenders
Use balance sheet capital from institutional investors and decisions loans via proprietary risk scoring algorithms that rely largely
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DR DRAFT DR DRAFT US ONLINE LENDING ECOSYSTEM
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DR DRAFT DR DRAFT UK: P2P MODEL DOMINATES SMALL BUSINESS LENDING
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Source: Data includes only members of P2PFA Source: P2PFA, Morgan Stanley Research.
0% 0% 10% 10% 20% 20% 30% 30% 40% 40% 50% 50% 60% 60% 70% 70% Fu Funding Ci Circle Le LendInvest Ma MarketInvoice Th Thincats La Landbay Ou Outstanding Loans Ne New Loans UK Peer to Peer Lending Market Share – Business Focused Platforms
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UK: P2P PLATFORMS ALSO SEEN AS GOOD VALUE AND EASY TO USE VS. BANKS, BUT LESS SECURE AND HIGHER RISK
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So Source: UK UK Al Alternative Finance Industry Report (Ne Nesta 2014) 2014), Morgan Stanley Research
UK Public Perception of P2P Lenders vs. Traditional Banks
0% 0% 5% 5% 10% 10% 15% 15% 20% 20% 25% 25% 30% 30% 35% 35% So Socially y Re Responsible Fl Flexibility Va Value for Mo Money Ea Easy to Use Su Sustainable Tr Trust Se Security Le Least Risky P2 P2P Ba Banks
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DR DRAFT DR DRAFT US AND UK: ONLINE MARKETPLACE IS EVOLVING RAPIDLY
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Sources of Customers Product Sources of Capital
Small business customer does not always know what product will best meet their needs § Ba Bank Partnerships
§ Santander / / R RBS i in UK § Gov’t ’t mandate i in UK?
§ Co Consortiums
§ Ba BancAlliancein in US
§ Tr Traditional Banks § Lo Loan Br Brokers § Ac Account Re Receivable / In Invoice L Lending § Term L Loans § Sh Short-term C Cash Ad Advances § Gov’t ’t in UK v via British Business B Bank § Re Retail § In Inst’l ’l / H Hedge F Fund § Tr Traditional Banks
§ Wa Warehouse Lines
§ Sy Syndication Markets
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DR DRAFT WHAT IS THE APPROPRIATE LEVEL OF REGULATION IN US MARKET?
NE NEED FOR RE REGULATION § No current designated federal regulator
§ Should there be one? § CFPB should implement Dodd Frank 1071
§ Lack of transparency on costs to small business owners § Concern that this might be the next ‘subprime market’
§ Emergence of loan brokers § High costs
IM IMPROVE EXIS ISTIN ING REGULATIO ION/ EN ENCOURAGE E MARKET ET MEC ECHANISMS § Clarify and streamline existing state and SEC regulatory oversight § Let nascent market develop § Current industry move to improve transparency
§ Borrowers’ Bill of Rights § Consistent disclosure of cost metrics
§ Internal industry oversight increasing on loan brokers
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Tw Two views:
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DR DRAFT UK APPROACH
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Su Supportive Government En Environme ment
§ Pr Providing funds through platforms via B British Business B Bank § Tax f free allowances f for IS ISA investments i in P2P p platforms § Results o
Competition and M Markets Authority 2016 study on s small business l lending in UK
§ Po Potential support for referrals of de declines to P2P lende ders
St Streamlined Regulatory En Environme ment
§ Single regulator: : Financial Conduct A Authority vs. o . overlapping regulation i in U.S .S. § Pr Principles-based o
§ In Investor protections, including ca capital requirements § Bo Borrower protections: “clear, fair an and not mislead ading”