The rise of challenger banks

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Small business banking is broken.

To illustrate, research by EY has shown that 36% of small-medium-sized enterprises (SMEs) have sought financing through loans from personal sources, of which 47% cite being discouraged by the models of traditional banks as the main reason.

The complexity of SME financing stems from the fact that their needs change drastically depending on the sector and stage of development that they are in.

Moreover, the majority of small businesses do not have a financial specialist on their team, and as such, small businesses are often playing catch-up with their finances.

Clearly, the ‘one size fits all’ model is well and truly dead. Considering that 99% of companies are SMEs, it’s about time that the banking ecosystem adapts.

In this new age of fintech, finally, the financial landscape is changing. Regulation such as Open Banking and the ascent of API-focused fintechs (ourselves included) has opened up the market to a multitude of apps that can help improve the SME banking experience.

Moreover, several startups around the world are making a real impact in tackling the SME banking issue, creating entirely new banks from the ground up. These banks are relevant as ever, with Tide (which is covered below) announcing earlier this week that they have 85,000 small business customers, compared to The Co-operative Bank’s 86,000.

In this article, we will cover who the main challenger banks are and how they are paving the way for a modern business banking landscape.

Tide

Founded in 2015, Tide is one of the first digital-only banking platforms tailored to small businesses. Providing business current accounts with automatic transaction categorisation, instant invoicing, scheduled payments and team cards, has given Tide the edge in the SME banking market.

Furthermore, their integration with accounting software providers and alternative lenders allows them to give their clients a seamless financial experience.

Tide aims to continue upwards, with plans to capture 8% of the market by 2023. This has been significantly bolstered by a £60 million grant given to them as part of Pool A of the Capability and Innovation Fund.

Starling Bank

Starling Bank was founded in 2014 and launched its business account capabilities just over a year ago. They offer flexible business overdrafts, automatic transaction categorisation, and goal pots for big future purchases.

However, their main distinguishing factor is the Starling Marketplace, which allows other companies to access Starling’s open API and integrate their software together. Some names worth mentioning include Yolt, Xero, and Wealthify.

As of February, Starling claims to have 30,000 SME accounts, and are investing heavily in the SME banking sector of the company throughout 2019 after securing a £60 million Series C and £100 million as part of Pool A of the Capability and Innovation Fund earlier this year. 

Revolut

Launched in 2015, Revolut is best known for personal banking, although they have business current accounts. Revolut offers an account with multi-currency capabilities, low foreign exchange fees, transfer capabilities across 29 different currencies, and a variety of useful integrations with platforms such as Slack, Zapier, and FreeAgent.

Revolut has achieved the coveted unicorn status in a very short amount of time, and as of February 2019 over 70,000 companies have signed up for a Revolut account. As a testament to the popularity of their offerings, Revolut is working on expanding into other markets such as Australia and Canada throughout 2019.

Mettle

Mettle is the big banks’ response to these new challenger banks. Launched in 2018, Mettle is an independent digital entity by NatWest allowing customers to open a business current account in minutes offering SMEs features such as invoicing, business performance forecasting, bookkeeping, and payment chasing services.

Mettle is still in its infancy and is relying largely on its relationship with NatWest and partnerships with 11:FS and CapCo to establish reputability and an initial user base.

It will be interesting to see how Mettle develops in the future, as having access to NatWest and thereby RBS resources could potentially give them a serious leg up over the competition. In any case, we should expect to see the other ‘Big Four’ banks (Lloyds, HSBC, Barclays) follow suit in the future, as they transition to digital platforms.

Looking Towards the Future

So, what does the future hold for challenger banks? Many things.

First, open banking is set to go live all over Europe this year. The work being done to standardise the initiative will enable these companies to innovate at a level that was never possible before.

Secondly, investment in fintech will continue to increase, especially with the spread of open banking. 2018 was a record year for fintech investment, with global investment reaching $111.8 billion, up 120% from 2017.

In that vein, the Capability and Innovation Fund has already provided funding for some London-based fintechs such as Funding Options and Tide. Four more companies will be receiving £10 million in funding as part of Pool C, which is focused on the expansion of lending and payment services for UK SMEs. This will provide another opportunity for local start-ups to take their products to the next level.

All of this will ensure that mutually beneficial partnerships are formed between banks, be they traditional or challengers, and SME-focused fintechs.

Lastly, and most importantly, businesses are starting to warm up to the idea of trusting their money with fintechs. This will lead to more and more SMEs switching over to challenger banks, while traditional banks desperately try and transition to digital-based platforms. Perhaps the big banks will regain control with initiatives such as Mettle, but for now, the start-ups are ahead of the curve.

Overall, we are confident that our native London – the fintech capital of the world – will continue to pave the way for the rest of the industry and have a lasting impact on small business banking.