A Silicon Valley Bank in London

From Oxford colleges starting their own bank, to a peer-to-peer borrowing scheme bypassing traditional lenders, the innovators cash in on the hard times...

by Michael Northcott
Last Updated: 19 Aug 2013

The American Silicon Valley Bank today announced the launch of its first UK commercial banking service for the UK’s burgeoning technology industry. The bank, which is the lender of choice amongst Silicon Valley’s buzzing tech scene in the US, now poses a threat to the traditional business lending models of the UK’s high street classics. It counts Facebook and LinkedIn in its roster of clients.

SVB’s lending criteria are focussed more on tech-industry values rather than what the balance sheet looks like, meaning rapid-growth companies get a better deal. SVB considers everything from the three-man start-up to the larger tech giants, and considers loan applications on the basis of factors such as the value of a firm’s patent portfolio, an assessment of how much the company can grow, and how much other funding it can secure on the hunt for profitability. 

The UK head of SVP, Phil Cox, told MT: ‘If these companies go to their bank today, they’ll be asked traditional questions about accounts and cash flow. We don’t look at it that way. We look at the business, whether there is IP value there, who has invested, and is the business likely to disrupt its industry space.’ Sounds just like the kind of US techie jargon that Silicon Valley is famous for…

Meanwhile, on Saturday it was revealed that another new kid on the block, Zopa, has now hit more than £200m worth of loans through its peer-to-peer lending system. Zopa leads a group of three websites that match savers with borrowers and completely bypasses the retail banks. The company, which started in 2005, claims it can offer both lenders and borrowers better rates by stripping out the ‘middle-man’: high street banks. 

The model provides no protection for savers’ deposits, and is not regulated by the Financial Services Authority, but the system means lenders lend a small amount to hundreds of borrowers, rather than to individuals. The level of risk is therefore dramatically reduced, as it would take for all of your syndicated borrowers to default in order for you to lose all of your money (which is unlikely). This is certainly a clever system which the big banks ought to be wary of: with such piffling interest rates available on ISAs these days, lenders are right to be looking at their options… 

Finally, university college Trinity Hall in Cambridge has entered into a joint venture with the local council-controlled pension fund to create a new bank for SMEs. The bank, which launched yesterday, is called Cambridge & Counties Bank and has the aim of lending more than £100m to SMEs over the next four years. The bank will exploit a gap in the market where the UK’s ‘big five’ have missed their lending targets as set out by the government’s Project Merlin deal. 

It will be owned 50% by the pension fund (which controls assets of around £1.6bn) and 50% by the college, which wants to increase returns on its endowments. Chief executive Gary Wilkinson said the launch is in response to research by his company suggesting that more than 60,000 loan applications by SMEs had been rejected in the last six months of 2012. 

So while the global banking industry continues to struggle through a debt crisis and its management figures endure the endless barrage of criticism, space has been made for disruptive new players. With a lot of SME-focussed innovation coming to the fore, MT thinks this can only be a good thing…

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