Author Brightstone Law LLP

The Challenge for Challenger Banks

Being the sad couch potato, Man Utd fan that I am, I subscribe to MUTV. That’s a TV station where United never lose, always score (unlike today) and cover themselves in glory. And in the very limited schedule which is MUTV, they re-run classic games from the 70’s and 80’s.

What on earth has that got to do with short term lending?

The answer;
muddy pitches, x
full backs that don’t cross the half way line x
the absence of diving x
and anything goes tackling x

Answer: perimeter advertising

Perimeter Advertising.

Look at the perimeter advertising at a football ground in those halcyon days, and you will see companies and businesses which were the leading lights of the day advertising their wares. Radio Rentals, Blockbusters, Austin Reed, and Midland Bank. In the 70’ s and 80’s, they were at the top of their game, brand recognition, huge market share – seemingly impregnable and set for the future. It was unthinkable then, that in a relatively short time they would no longer be around; their position usurped by fresher determined competitors able to innovate and deliver, but just as importantly, learn good lessons from the leading players, take the best bits and improve on the qualities that brought the establishment, their success.

And that’s just what short term lenders did when they arrived, when they came up against high street banks, and institutional lenders 5, 10,15 years ago.

And here lies the most significant and immediate challenge for the short-term lending market, as the major most successful players continue their upwards growth curve, expanding their businesses.

Reasons for Success

The short-term lending sector has outperformed almost every other sector of the lending market over the last 5 years. And there are good reasons for this:

• The space is filled with clever, clever people, people I hugely respect and admire, who saw opportunity and grasped it.
• Lenders knew and understood what the market, customer base and distribution wanted and needed, and they met that need in a commercial and direct way.
• Lenders underwrote based on their own knowledge and property know how, backing their expertise, over more institutional, inflexible criteria- driven process being exhibited by institutions run by underpaid, de-motivated staff; short term lenders took commercial views, on commercially viable lending.
• Lenders, ran tight easy to steer ships, quick to react to market conditions and needs, and easily outperformed the traditional money supply on delivery, execution and delivery, at rates that provided real and sustainable returns.
• Lenders found their property niche and areas of expertise, and concentrated their efforts in those areas, developing that expertise and layering it with real transactional experience.
• Key members were empowered to make decisions quickly and back their judgment.
• Lenders put together close teams of professional partners with the correct and appropriate level of transactional experience and expertise, horses for courses, professional partners who, importantly, understood, and shared the ethos for delivery, execution and certainty. Communication lines were open and easy.

These are just some of the reasons behind success.

Truly, it was not about taking risks or lending where others would not. Short term lenders succeeded.  Traditional banks and lending institutions outdated thinking and processes failed to keep up with the times, weighted by regulation, compliance and bureaucracy, but at other times, simply failing from a lack of vision and foresight.

If you agree with that analysis, in whole or in part, you will not be surprised at how the market flourished and the short-term lending sector succeeded. For success was built on profit not growth. It was grammar school not private school. It was about recognising a spade and then calling it a spade. It was about pricing correctly, and sensibly, and being unafraid to charge a premium for a premium service.

And guess what?

Notwithstanding the premium price, the market grew, and short term lending became mainstream and acceptable. More and more sophisticated borrowers looked to access funds at rates they were not used to because they were prepared to pay a premium for that premium service. Commercial businesses opted to go the bridging route, because bridging lenders were displaying the same kind of commerciality in their lending that they, as commercial organisations themselves, understood and displayed in their own businesses.

Simply put, bridging companies attacked the banks and beat them, not on price, not on risk, but on service, execution and delivery.

The challenge now for the main players is to retain the qualities that set them on the road, and to build on these and innovate from there.

Benign market conditions, an ability to raise funding from all manner of sources, and well thought out exit strategies has increased the appetite to lend, leading to bigger and expanded lending businesses. The larger the business, the more difficult the corporate governance, the more difficult effective recruitment. Add to that compliance, and regulation and the ever-increasing needs to internally monitor for risk, and the challenge facing the larger sector players becomes ever clearer.

How to maintain and continue to deliver at the same level on service, in a larger more corporate, more rigidly structured model. In effect, how to not evolve into a “bank”, with all the deficiencies and faults that lost banks’ their pre-eminence in this lending space. Fail in this, and face disappointing your distributors, your end user, your customer base If that’s the challenge, what’s the solution?

I am no business guru, just a simple lawyer, but a lawyer with over 20 years’ experience in the transactional space of short term lending. I have seen businesses flourish, and business fail. I have seen market conditions change, and product development at an ever-increasing pace, and my sense is that the market is nearing a pivotal time.


I offer no solution to the challenge, but I believe there are some fundamental principles that are worthy of consideration

• Delivery and execution remain the most important usp for distributor/ customer
• Specialist teams, whether underwriting or credit collection, must be filled with knowledgeable and empowered decision makers
• Surround yourself with the right professional partner relationships, those who understand not just their business but your business and business needs as well. In your professional partners; technical competence from lawyers is a gimme, but in addition to that you should look for and expect to receive practical guidance which only comes with ability and experience
• Retain and cascade the culture on which success was founded
• Business heads remain involved and active
• Recruitment; fill round holes with round pegs, people with requisite not generic experience

So here lies the challenge for the larger lenders, and here also lies the opportunity for new entrants, who come to a more developed market, focussed, contained, compact and less restricted, and now armed with considerable market intelligence from the last few years.

Austin Reed, Blockbusters, Midland Bank failed to read the warning signs and react. Lest hope our sector players do not.

Jonathan Newman