The first Covid lockdown proved a mixed blessing for the banking platform Tide. The government’s first stay-at-home orders, in March 2020, sparked fear throughout the City, and fintech firms such as three-year-old Tide were no exception. The pausing of an entire economy threatened to decimate demand for its services.
But opportunities started to unfold when then-chancellor Rishi Sunak revealed plans for a 100% taxpayer-backed loan scheme that would keep traders afloat. It gave burgeoning lenders a chance to not only support struggling business customers, but potentially attract new clients by distributing state-backed funds.
Tide seized the moment. It applied to join better-known banks on the scheme, even asking its customers to lobby MPs on its behalf. Within weeks, it had been authorised to issue loans, and by the end of 2020, Tide’s customer base had nearly doubled, though it disputes the extent to which this was due to new customers hoping to secure bounce back loans. The company’s “rapid and sustained growth” was later hailed by its backers, who invested another $100m (£84m) last year.
But government figures, first released last month and updated this week, have cast a shadow over that success, showing that 33% of Tide’s bounce back loans have gone unpaid. That is one of the worst track records of all the lenders involved, surpassed only by Capital on Tap, which loaned two-thirds less than its rival.
Tide, which was last valued at $650m, says that percentage reflects the fact that it opened its doors to younger, and therefore riskier, business customers as its membership expanded. But this growth came at a price, resulting in defaults that cost the taxpayer at least £20m – a figure that could have been higher had Tide not controversially run out of cash just seven weeks into the scheme.
Speaking to investors, former employees and the company itself, the Observer has pieced together a story of an enterprising fintech firm whose drive and ambition may have unintentionally cost the UK government millions of pounds.
When it launched in 2017, Tide was part of a generation of fintechs – financial technology firms – promising fast access to finance just as memories of the banking crisis had started to fade.
Sarah Kocianski, an independent fintech consultant, said their success was down to a combination of factors. Regulators were encouraging competitors to the high street banks, and new tech such as smartphones and cloud computing meant firms could cut costs and offer new products in a way big lenders, with legacy IT systems, could not.
It sparked a frenzy of investment. “There was a huge amount of money pouring in from venture capital and private equity firms,” said Kocianski. However, she said, many of those investors put “too much emphasis on growth, rather than profitability”.
Tide, for its part, pitched itself as a one-stop shop for businesses. Co-founders Errol Damelin – one of the duo behind controversial payday lender Wonga – and ex-Barclaycard banker George Bevis attracted backers including Zoopla boss Alex Chesterman, Lovefilm co-founder William Reeve, and venture capital firms LocalGlobe and Passion Capital.
But Tide isn’t actually a bank – it doesn’t lend its own money. Unlike fintech peers Monzo and Starling, Tide chose not to apply for a full banking licence, which would allow it to hold customer deposits and lend against them. Bevis, then Tide’s chief executive, said in 2017 that a licence would be a “management distraction”, requiring staff and resources to deal with cumbersome capital requirements, regulatory scrutiny and costly deposit insurance schemes.
Instead, it partners with ClearBank to offer bank accounts. While it started offering some own-brand loans in late 2019 – funded by investors – third-party firms lend the money and provide services like accounting software and invoice automation.
Among its selling points is speed: businesses can open an account in minutes using only a passport or driving licence. Although additional checks are conducted, it is substantially faster than mainstream banks, where the process can take weeks.
Less than a year in, Bevis stepped aside to make way for someone experienced in “international scale-ups”. Tide, which earlier this year launched in India, had ambitions beyond the UK. Enter Hamburg-born Oliver Prill, then 47, who is a big fan of Amazon founder Jeff Bezos. He joined from another online lender, Kreditech, which used browsing history and social media profiles to assess borrowers with little to no credit history in countries including Poland, Spain and Russia. It collapsed during the pandemic, but prior to that, Prill oversaw its international expansion, before moving to Tide in August 2018.
Within weeks of joining the UK business, Prill set his sights on a valuable prize: a government fund designed to boost competition in business banking. Initially told that Tide did not qualify, he protested publicly and eventually won a £60m grant from the fund. As part of its bid for the cash, Tide set a target of taking an 8% share of the business banking market – a goal that would need its 55,000 customer base to grow to at least 450,000 by 2023.
With its eyes on the prize, Tide started offering eyecatching new services. For example, customers could register a new limited company, and open an account in that company’s name in one go. As added incentive, Tide would even pay the £12 incorporation fee to Companies House.
But by spring 2020, Tide was facing a countrywide lockdown that would force most businesses, including many of its customers, to temporarily shut. The Treasury stepped in with a scheme offering loans of up to £50,000 per company, at 2.5% interest, with the government liable for 100% of the losses if borrowers defaulted. Lenders did not have to conduct normal credit checks; they only had to ensure firms met eligibility criteria, including that they were trading before 1 March 2020.
But most of the eight banks originally authorised to give bounce back loans started to restrict them to existing clients and temporarily suspend new applications, leaving a gap in the market for those willing to serve businesses with nowhere else to turn.
Seeing an opportunity, Tide advised small traders to write to their MP and support its application to the Treasury to be approved as a bounce back lender. Within 10 days, it was admitted. As Tide did not have a banking licence, undisclosed investors agreed to put up their own cash to fund the bounce back loans.
Its 370 staff were then faced with processing what became a 70,000-strong waiting list of potential borrowers. That was when the problems started. Frustrated business owners took to Twitter, complaining about delays and radio silence after lodging their applications.
As businesses became more desperate, Prill published a blogpost in late May, telling existing customers to hold tight, and – despite growing pressure on its own funds and staff – urging prospective applicants to open a Tide account and join the list.
Former employees who spoke to the Observer said that, like any startup boss, Prill was focused on boosting customer numbers. “There was a large appetite for new accounts, as there was a big focus, and company-wide updates, on market share,” one ex-staffer said. Prill faced the added pressure of meeting targets linked to the £60m grant, which would be paid only when Tide hit certain milestones.
It soon became clear that Tide had bitten off more than it could chew. In June, Prill gave the first hint that Tide was struggling to secure enough cash to finance all the loans in its pipeline. Its backers were apparently put off financing more loans by a clause in the government guarantee that said investors would not be compensated if Tide went bust.
“At the moment, it’s the need to arrange funding that’s holding us back,” Prill told anxious customers.
In July, Tide ran out of bounce back cash, sparking a furious reaction from some members. Prill took one last run – urging the Treasury to change the terms of the scheme and allow the Bank of England to hand money directly to non-bank lenders – but officials refused to budge.
But Tide did not walk away empty-handed. While it only managed to issue 1,826 bounce back loans, worth a combined £59m, between 19 May and 7 July, it gained tens of thousands of new customers along the way.
According to Tide estimates provided to the Observer, about 28,000 of the 46,000 new customers it gained over those seven weeks were beyond what it would normally expect. They accounted for about 15% of its total 2020 account openings, and some 19,000 of those are still Tide members today.
Tide said it would have attracted customers regardless of its accreditation to the scheme, and that part of its growth was due to the fact that other banks were not taking new accounts during the pandemic. Overall, the company said, its bounce back customers “did not make a material difference to Tide’s growth”.
Tide would later credit its “significant” customer growth in 2020 – it hit 284,000 members at the end of that year – for annual revenues tripling to £14.4m. It later secured another $100m in July 2021 from investors who said they were impressed with Tide’s “rapid and sustained growth.”
While participation in the bounce back scheme may have been beneficial for Tide, it has come at a cost to taxpayers, who are now on the hook for nearly £20m.
Controversially, Tide has decided not to offer a government-recommended repayment scheme called pay-as-you-grow (PAYG), which spreads repayments over 10 years rather than six, easing the burden on customers who might otherwise be at risk of default. The Federation of Small Businesses last year said the move was “deeply concerning.”
Tide said the terms of its own funding meant it could not offer PAYG, and that it had “alternative arrangements and repayment plans”, subject to internal policies.
Regarding its bounce back default rate, Tide said it had been quicker to put in claims than some, and that company failures were broadly consistent with the natural pattern for early-stage businesses. “Furthermore, the businesses we serve are typically younger, so the risk of failure is much higher. The next 12 months will give a better picture of the NPLs [non-performing loans] across all the lenders.”
It reiterated last week that some lenders may be “more advanced than others” in submitting their bounce back claims to the government, which could distort the figures.
“We are proud to have acted for our members during the pandemic, when small businesses across the UK were facing financial distress, significant operational difficulties and mass closure,” Prill said in a statement. “We felt personally responsible to assist them where we could, and this included urging the government to extend the bounce back loan scheme to non-[bank] lenders. We continue to champion small businesses and small business creation across the UK, since these enterprises are the lifeblood of the country’s economy.”