If Wonga are trying to muscle in to the business market, we need a British Investment Bank more than ever

Payday lenders, not content with squeezing individuals, are now going after businesses too.

Anybody who lives in London and/or uses London buses will know that those ghastly Wonga adverts have been replaced. By Wonga adverts. Though this time, for small businesses.

Wonga for Business offers loans of £3,000 to £10,000 which are available for terms of between one and 52 weeks. Costs vary with an interest rate of between 0.3 per cent and two per cent which seems competitive if repaid early, but a 52 week loan, according to Tim Harford, at 2 per cent could work out to have attached to it an interest rate of 280 per cent per year.

Another estimate, this from Sharlene Goff (the FT’s retail banking correspondent), estimated that the largest loan (£10,000) for the longest term (a year) would rack up almost £11,000 in charges.

I exchanged emails with a spokesperson from the company during the week, hoping to find out some tangible figures for how well the new venture is going. All I was told, sadly, was that there have been thousands of applications thus far, and good feedback from people who have been approved, but due to the commercial nature of the company all evidence was kept under wraps.

OK so the suspicion is that it is all bluster. A commercial company with no evidence to show off saying that they're doing great to put the willies in their competitors. But I'm not so sceptical, unfortunately.

Wonga have come to be recognised as another unsavoury payday lender, and for good reason in my opinion, albeit one that is slightly more public-facing than the rest (and this says an awaful lot about the rest). Though what I've come to learn about this financial product is that it often fills in and exploits the gaps where mainstream services are falling behind.

This is the case with payday loans to individuals. And it is the case for businesses as well. Research in November by the Federation of Small Businesses showed that between 2007 and 2010 there was a 24 per cent fall in successful loan applications, while more than half of the small firms that applied for an overdraft last year were rejected.

Even in the good times things weren't sparkly. As Duncan Weldon at the Touchstone Blog has pointed out, "around 85 per cent of bank lending [had been] going to either financial companies or property" even in better financial times.

Competition in this market is rather flat as well. In 2011 the Independent Commission on Banking identified that the largest four banks account for 85 per cent of SME current accounts.

So though Wonga are playing on a very real problem in the state of play in the financial sector, the real issue lies in the failure of banks to lend to small and medium businesses – surely a vital element in our economic recovery.

But what is in our armoury? What tools can we use? It certainly didn't go unnoticed this week that Ed Miliband used the opportunity at the Co-operative Bank HQ to talk up the merits of a British Investment Bank – on the day that the Labour party published a report by Nicholas Tott, a former city lawyer, to make that very case.

Although, this case has been made again and again – why should it have taken this long? One of its most active proponents is Lord (Robert) Skideslsky. In one of his many cases for a national investment bank he exemplifies the European Investment Bank (the European Union's public development bank).

EU governments that own the EIB, in contributing an equivalent sum of £32bn, alongside the bank itself borrowing a further equivalent to £271bn from private capital markets, the EU governments were able to finance investments worth more than the equivalent of £304bn including for ports from Barcelona to Warsaw, the TGV network in France and the world-leading offshore wind industry here in Britain, creating jobs along the way.

Another example, in Germany, is the Kreditanstalt fur Wiederafbau (KfW), a second tier bank, provides cheap loans (liquidity loans at low rates and long maturities) to SMEs using the commercial banks as intermediaries. In 2010, KfW financed loans worth a record €28.5bn for SMEs, creating 66,000 jobs in addition to the 1.3m jobs it helped maintain (which has been on Labour's mind since Lord Mandelson made it the model de jour).

Why has it been most pertinant that Miliband raise the spectre of a British Investment Bank at the time he did (even though he, and others, commissioned the report by Nicholas Tott in December 2011)? Because as Skideslsky notes:

“The financial crisis has left the impression that the main purpose of the banking sector is to enrich a tiny elite at the expense of taxpayers.”

We may all understand in principle that a functioning financial system is crucial to the national economy, but we can hardly attest to this happening in practice (consider, if you will, the NEF calculation that for every £1 paid to “elite” city bankers £7 of social value is destroyed, as well as the damning verdict of Adair Turner, the chairman of the UK Financial Services Authority, who views the past decade of financial innovation as mostly "socially useless").

In short, a British Investment Bank is something that could gain cross-party consensus, provide a real solution to the lending shortfall, build up SMEs, jobs and growth – and allow entrepreneurs to avoid the lending freeze or risking it all with expensive business loans from Wonga.

As a parting shot the Wonga spokesperson told me that we can expect to see “more products from us before the end of the year, but I can't give you any hints I'm afraid”. Perhaps if we are diligent enough we can spot the financial shortfalls before Wonga get there first.  

A payday lender. Photograph: Getty Images

Carl Packman is a writer, researcher and blogger. He is the author of the forthcoming book Loan Sharks to be released by Searching Finance. He has previously published in the Guardian, Tribune Magazine, The Philosopher's Magazine and the International Journal for Žižek Studies.
 

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Will Euroscepticism prove an unbeatable advantage in the Conservative leadership race?

Conservative members who are eager for Brexit are still searching for a heavyweight champion - and they could yet inherit the earth.

Put your money on Liam Fox? The former Defence Secretary has been given a boost by the news that ConservativeHome’s rolling survey of party members preferences for the next Conservative leader. Jeremy Wilson at BusinessInsider and James Millar at the Sunday Post have both tipped Fox for the top job.

Are they right? The expectation among Conservative MPs is that there will be several candidates from the Tory right: Dominic Raab, Priti Patel and potentially Owen Paterson could all be candidates, while Boris Johnson, in the words of one: “rides both horses – is he the candidate of the left, of the right, or both?”

MPs will whittle down the field of candidates to a top two, who will then be voted on by the membership.  (As Graham Brady, chair of the 1922 Committee, notes in his interview with my colleague George Eaton, Conservative MPs could choose to offer a wider field if they so desired, but would be unlikely to surrender more power to party activists.)

The extreme likelihood is that that contest will be between two candidates: George Osborne and not-George Osborne.  “We know that the Chancellor has a bye to the final,” one minister observes, “But once you’re in the final – well, then it’s anyone’s game.”

Could “not-George Osborne” be Liam Fox? Well, the difficulty, as one MP observes, is we don’t really know what the Conservative leadership election is about:

“We don’t even know what the questions are to which the candidates will attempt to present themselves as the answer. Usually, that question would be: who can win us the election? But now that Labour have Corbyn, that question is taken care of.”

So what’s the question that MPs will be asking? We simply don’t know – and it may be that they come to a very different conclusion to their members, just as in 2001, when Ken Clarke won among MPs – before being defeated in a landslide by Conservative activists.

Much depends not only on the outcome of the European referendum, but also on its conduct. If the contest is particularly bruising, it may be that MPs are looking for a candidate who will “heal and settle”, in the words of one. That would disadvantage Fox, who will likely be a combative presence in the European referendum, and could benefit Boris Johnson, who, as one MP put it, “rides both horses” and will be less intimately linked with the referendum and its outcome than Osborne.

But equally, it could be that Euroscepticism proves to be a less powerful card than we currently expect. Ignoring the not inconsiderable organisational hurdles that have to be cleared to beat Theresa May, Boris Johnson, and potentially any or all of the “next generation” of Sajid Javid, Nicky Morgan or Stephen Crabb, we simply don’t know what the reaction of Conservative members to the In-Out referendum will be.

Firstly, there’s a non-trivial possibility that Leave could still win, despite its difficulties at centre-forward. The incentive to “reward” an Outer will be smaller. But if Britain votes to Remain – and if that vote is seen by Conservative members as the result of “dirty tricks” by the Conservative leadership – it could be that many members, far from sticking around for another three to four years to vote in the election, simply decide to leave. The last time that Cameron went against the dearest instincts of many of his party grassroots, the result was victory for the Prime Minister – and an activist base that, as the result of defections to Ukip and cancelled membership fees, is more socially liberal and more sympathetic to Cameron than it was before. Don’t forget that, for all the worry about “entryism” in the Labour leadership, it was “exitism” – of Labour members who supported David Miliband and liked the New Labour years  - that shifted that party towards Jeremy Corbyn.

It could be that if – as Brady predicts in this week’s New Statesman – the final two is an Inner and an Outer, the Eurosceptic candidate finds that the members who might have backed them are simply no longer around.

It comes back to the biggest known unknown in the race to succeed Cameron: Conservative members. For the first time in British political history, a Prime Minister will be chosen, not by MPs with an electoral mandate of their own or by voters at a general election but by an entirelyself-selecting group: party members. And we simply don't know enough about what they feel - yet. 

Stephen Bush is editor of the Staggers, the New Statesman’s political blog. He usually writes about politics.