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The Capability and Innovation Fund – Rise of the Challenger and digital banks
The first round of the Capability and Innovation Fund waiting game has come to an end with the Banking Competition Remedies Ltd (BCR) naming Metro Bank, Starling and ClearBank as winners of its £280m giveaway. However, the game is still very much in play for those seeking funding from pools B, C and D with applications for group B opening as recently as 1 February 2019. And the sums available are not insignificant, totalling £65m, £40m and £25m for Pools B, C and D respectively, so what is holding companies back from going for a bite of this one-off funding apple?
There was considerable media interest in those applying to Pool A, and some surprise when those successful were announced. Two of the three were digital-only propositions and the third, Metro Bank was surrounded by controversary after it made high-profile accounting errors. The absence of well-established high street names from the list of winners also raised some eyebrows. CYBG, despite being rumoured as having invested heavily in its bid, missed out, as did TSB and Nationwide. This should act as an encouragement to smaller firms and fintechs considering an application to subsequent rounds of funding where there is no requirement to hold banking licences: indeed, Pools C and D are specifically targeted at payment firms, lenders, and fintechs. Importantly, in assessing a firm´s eligibility, the BCR references two of its principal objectives: to nurture greater competition with RBS in the provision of SME banking services and to develop and improve the provision of banking services to the sector. The use of innovative technologies in any proposed solutions is also given prominence and this no doubt helped ClearBank secure its £60 million handout from Pool A. Given that fintechs and disruptors have been at the vanguard of the most exciting developments within financial services in recent years, those companies with the potential to deliver a sea-change in banking services for the previously overlooked SME sector will have a strong case for consideration, regardless of size*.
Nor do fintechs at the smaller end of the spectrum need to go it alone. An application for funding in Pools C or D does not preclude involvement in Pool B, which is aimed at modernising existing or developing new business account offerings, by co-submitting with eligible challenger banks. Our discussions with many larger applicants have included specific reference to working with smaller fintech partners as part of their overall solution. This also benefits the fintech partners themselves, as their association with larger brands helps them from both a distribution and credibility standpoint. The financial services industry is thriving from a level of collaboration between disparate entities not previously seen before and the Capability and Innovation Fund is an opportunity for challenger banks to work with fintechs to enhance their chances of being successful in their application. The net result of these partnerships should be a vastly improved banking outcome for SMEs which harnesses the best qualities of each party.
To some parties, the prospect of free money might seem too good to be true and that any grant will be contingent on repayment over time. Again, this is a misconception. The Capability and Innovation Fund is not a business loan and there is no requirement to pay back any funds as long as firms adhere to the rules governing their allocation. There are circumstances where a company will be liable to return funds, namely if an applicant cannot use the funds as laid out in its business case and any new business case is not approved; if there is a material breach in the way funds are used; or if there is a change in the control of the company where the parent or another subsidiary has a share greater than 14 per cent of the SME market. These conditions aside, successful companies will own their funding as long as they are put into action as proposed.
Some businesses might feel that they have left it too late in the day to apply but while deadlines must be adhered to as is the case with all tendering processes, there is no advantage (or disadvantage) in an early submission. Fintech in particular is a fast-moving sector and a business may have key pipeline developments that may enhance an application. Each company in the running should therefore make a decision based on when the most opportune moment would be to make their strongest case for consideration.
Other factors may be at play which have deterred some eligible companies considering an application to the Capability and Innovation Fund such as low levels of awareness or concerns over the onus of reporting once successful. However, the prospect of receiving potentially game-changing funds whilst being part of a once-in-a-generation overhaul of the banking system to significantly improve the experience of one of the most important sectors of the UK economy are incentives that are hard to ignore.
Our recommendation to those considering an application to the Capability and Innovation Fund has been to first confirm eligibility, then critically evaluate whether the proposed solution has the necessary attributes to convincingly meet the BCR´s criteria. If these two tests are passed, then mobilising the business behind the bid is essential, as a well prepared proposal, substantiated with clear plans and a focus on delivering outcomes will need the full backing of the senior team to deliver success.
*Those applying for Pool D must demonstrate that they have successfully raised £1m in the three years leading up to their submission.
Chris Allen, is Digital and Innovation Director at international consulting firm Axis Corporate.
