Some may remember the days when there were banks and their managers around every other corner: they had considerable discretion in lending to small and medium-size businesses (SMEs). This is in great contrast to the present day when SMEs complain of the inordinate time taken for banks to make a decision about loan applications. This has led to challenger banks and other lending institutions offering ‘digital services’ which provide an alternative to traditional bank services, in particular in providing a rapid response. Open banking and digital lending were supported by the Banking Competition Remedies organisation when it arranged the injection of £775 million for challenger banks by Royal Bank of Scotland, as part of the EU’s penalty for the Government’s £45 billion bailout of the Scottish bank.
Digital Lending brings an entirely different concept to the lending market. It is based upon the customer disclosing to the bank its financial position on a continuing basis. The lender thereby provides an accounting function which allows the customer time to do what he or she does best: developing and running the business. The ever-present online information base should give the digital lender much more up-to-date information on the business’s trading performance, allowing much quicker decision-making and availability in regards to loans. Whether a quicker decision will be a good decision is unclear. Quick loan availability for the customer would imply that the loan is unsecured which the customer may not justify.
Whether the digital lending model is prudent or not might become apparent only over time, which might be quite long, given the economic cycle.
As a banking expert, an overwhelming number of my instructions have been in connection with loan losses, but where lenders claim negligence by professional firms such accountants or solicitors, but mostly by chartered surveyors (in respect of valuations). Defendants may then raise allegations of contributory negligence. Contributory negligence usually involves the lender’s failure to follow its own agreed policies.
How might an expert decide whether a digital lender has acted prudently? Prudence might be regarded as a ‘fixed position’ but this is wrong even before digital banking. A traditional lender may lend at a much higher interest rate or at a low percentage of value of charged property. In the first case, prudence is deliberately compromised in return for the chance of a greater financial reward and, in the latter, prudence is greatly enhanced by a large margin in security. Deciding whether the digital lender has acted prudently depends upon whether the lender’s risk was matched by its intended reward.
Whether the digital lending model is prudent or not might become apparent only over time, which might be quite long, given the economic cycle. In any event, when a digital lender has been let down by its customer being unable to redeem a loan, it is hard to see who else might be in the lender’s sights as regards legal recourse.
Litigation might flow from the ‘digital customers’ themselves if they believe that they have been wronged, for instance, by their information being spread too widely.
It is possible that if the digital lender brought a claim against those that helped build its business model, such as accountants and solicitors, this might lead to experts being instructed to opine on the reasonableness of the model from a risk point of view. This might leave the property valuers out of the picture, but then I am not sure that a digital lender would eschew a charge over property if asked for a particularly large loan. I cannot say for sure.
Litigation might flow from the ‘digital customers’ themselves if they believe that they have been wronged, for instance, by their information being spread too widely.
In summary, I believe that digital lending is likely to produce fewer instructions for experts than traditional lending because if a borrower defaults, there would not seem to be anyone else to blame but the digital lender itself.
Robin Bryant Consultancy
Flint House
Cocking
Midhurst
West Sussex
GU29 0HD
Telephone: 01730 813915
bryant@bankexpert.net
www.bankexpert.net
Robin Bryant has provided expert opinion in well over 300 claims involving those made by the banks themselves, mostly against professionals, but sometimes by corporate entities and individuals against banks. His experience has involved working for retail, international and investment banks. He has worked half and half for claimants and defendants and been cross-examined at trial 18 times.
