There is nothing small about the small to medium sized business (SME) sector in the UK. In 2018 it accounted for 60% of all private sector employment, according to the Federation of Small Businesses, with a combined annual turnover of £2 trillion making it a significant contributor the economic health of the country. This makes SMEs hard to overlook and yet this is precisely how many feel they have been treated by the banking industry. A common complaint is that banks do not understand them, do not focus enough of their product and service development on them, and leave them stranded somewhere between a ´retail plus´ and a ´corporate lite´ customer, meeting few of their real needs.
The ´big four´ high street banks have dominated the SME banking market in the same way that they do the retail segment. This is unsurprising as ready access to an adviser in a high street branch, brand awareness and a lack of alternatives have created a strong pull to small businesses towards known providers. The good news is that active steps are being taken to break this strangle-hold. As recompense for the bailout RBS received during the financial crisis, the Government-sponsored Alternative Remedies Package worth £775 million carved out of the bank has a primary goal of kick-starting competition in the SME banking sector. The Incentivised Switching Scheme is part of this initiative and will provide funding of up to £275 million to encourage SMEs to move their accounts from Williams & Glyn, RBS’s corporate banking entity, to other eligible institutions.
In tandem, the Capability and Innovation Fund has taken aim at the SME sector and intervened with a £425m market stimulus to promote innovation through technology and services to meet SME needs more closely and to deliver better outcomes. It is offering funding to challenger banks, new market entrants and fintechs to help them develop products, improve payments and lending and to commercialise banking technology. Metro Bank, Starling and ClearBank, partnering with Tide, have now been confirmed as recipients of the first tranches of these monies. This will facilitate the growth aspirations of a challenger bank, a digital pure-play newcomer with a new technology platform, and a ´utility bank´ offering white-labelled services to other banks to truly disrupt the market and provide greater choice to SME customers.
The Alternative Remedies Package has crystalised an existing market trend. The emergence of specialist SME banks such as Oak North and Shawbrook, combined with the increased focus on this segment by the likes of CYBG, TSB and Nationwide in particular, has started to offer a greater choice of providers. The challenge now is to demonstrate that they offer an enhanced service for the SME customer compared to the established players.
It is true that the small business sector is anything but homogenous, spanning vastly different industries, from construction to retail to marketing to the growing cohort working in the gig-economy. Despite this diversity, there is a commonality in the support small businesses need: access to funding; advice on how to plan for future expansion; products and services appropriate for all stages of their growth and in some cases decline. This can include invoice factoring and financing, treasury and cashflow management, working capital loans and simplified payment mechanisms. Technology is helping here. Lending decisions can be automated and approved more quickly; invoicing can be provided electronically and the data now available to banks through open banking means that they can gain a more complete and accurate picture of an SME´s finances and needs before offering potential solutions.
Access to finance is the lifeblood for any small business and there have been some positive developments in this respect. Firms like Kabbage have identified a need in lending to unconventional SMEs which operate in the gig-economy and which might struggle to provide the traditional financial history that an established bank would need to sanction a loan. Larger banks such as Santander and AIB have partnered with kabbage to make this offering available to smaller SME customers. Funding Options is another example of an innovative firm that recognizes that it is not possible to pigeon-hole small businesses. It offers an ´alternative yes´ to SMEs who have been turned down for loans at traditional banks. It does this by curating and presenting a panel of lenders which specialise in the types of non-standard lending required by SMEs which may not represent higher risk, but simply have needs which do not align to conventional lending practices. Fintechs are also meeting other needs such as sourcing business banking accounts with improved interest rates. For example, Akoni provides a platform for SMEs enabling them to maximise the returns on their cash holdings. It does this by offering access to a broader marketplace for deposits to help them secure the best interest rates from a spectrum of highly-rated banks.
While Metro Bank has committed to increase its high street footprint and Starling offers some limited banking services through Post Office branches, the perceived wisdom that all SMEs prefer a physical branch-based relationship with their bank is no longer true. Historically, concerns focused on being under-served by centralised service models, call centres, and automated responses based on algorithms rather than human judgement calls. However, the meteoric rise of Monzo in the retail sector demonstrates that customers are open to accepting new banking models as long as they deliver a service that adds value. Similarly, SMEs have recognised that many of their financial needs are better served digitally. Cloud based accountancy software such as Zero; easy-to-use payments platforms such as iZettle and additional real time savers such as receipt capture and pay roll management all introduce much greater efficiencies to a business’s financial infrastructure. Frequently fintechs and software businesses, which in being entrepreneurial in nature share many characteristics with their client-base, are better able to serve these needs versus traditional banking institutions which have faced challenges with their own IT infrastructure.
This does not mean however that the small business banking market will inevitably become polarised between traditional banks and challenger institutions. One of the consequences of the roll-out of the Alternative Remedies Package is the creation of a hybrid banking landscape where high street names collaborate with fintechs to fast-track the development of their digital banking services or to launch their own offerings in order to keep up with new market entrants. The result is that SMEs can continue to enjoy the reassurance of banking with a tried-and-tested high street entity, while benefitting from a more innovative approach to product development introduced by its fintech partners. Crucial to the success of any banking relationship is the ability of a business to articulate precisely what features it values – whether that is access to an adviser, fast and secure digital payments facilities or access to finance that meets the requirements of their particular industry and the stage of their development. Equally crucial is the ability of the bank to deliver services that meet those requirements.
Small enterprises are often seen as the barometer for the health of the economy. As the UK heads towards a Brexit of an as yet undetermined shape, continues to ride the fintech wave and remains one of the best places to set up a new business, the banking offer available to SMEs will become increasingly important to the future health of the economy, and of the UK as a financial and business centre. At last, the banking industry has woken up to this reality and through a greater emphasis on innovation, supported by political intervention, is beginning to place the client at the heart of its service development.
Daniel Meere is UK managing director of international management consulting firm, Axis Corporate