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Challenger banks: Can they make a difference to business lending?

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“I think banking should be done the way we do it.” Tracey Davidson, regional head of Handelsbanken, left her work at one of the five big high street banks to do banking another way.

The UK’s new breed of bank, often called challenger banks, are built on one big ethos: we are different. Different from the five high street banks that have historically been responsible for 90 per cent of business lending, and whose funding capacity has diminished over the past four years.

The question is, what makes them different?

Metro Bank became the first new authorised UK high street bank in 100 years when it opened its doors in 2010. Co-founder Vernon Hill was 26 years-old when he opened a single bank in the United States, back in 1973. The ethos he based it on was the same he brought to the UK decades later: relationship banking. “No stupid bank rules, open seven days a week,” in the words of Metro Bank’s head of Commercial Banking, Jason Oakley.

Oakley doesn’t hesitate to say what he thinks differentiates Metro Bank from the rest of the banking world: continuity, personality and relationships. Metro drive this point home at every opportunity, from their interior design to the personnel. The branches are open and colourful, behind the counter smile cheerful employees without any bulletproof glass to hide them, and the room is filled with people buzzing around ready to help. Staff are usually hired out of positions in retail, rather than other banks, to find the most service-oriented and friendly people; to get their first 450 employees, Metro interviewed 40,000 people, they claim. Even the tiles on the floor are designed to subtly lead the customer towards the open counter, rather than shoo them away to the bank machine or call centre.

That’s all nice and well, some might say – but how does that make Metro a better lender? Jason Oakley, who came to Metro from a position at RBS, says that relationship banking is the route to finding customised lending solutions for business – after all, there’s no one-fits-all solution.

“I’ve worked in the relationship channels for the past 30 years, and we spoke to a lot of customers who think they’ve been badly advised or that they’ve been forced into a call centre, and clearly the alternative that we offer around a dedicated contact is welcomed. We get to know you, all our meetings are face to face, and it’s about regular contact and dialogue.”

Metro claim to have entrepreneurialism embedded in their own culture, having been a startup only two years ago. When approached by a business, they “think about how can we make it happen”, whereas other banks are fixated on standard rulesets when it comes to lending.

Dialogue enables flexibility – a mantra not so different from other challenger banks. Handelsbanken famously leaves most major decisions to its individual branch managers, rather than deciding according to a standardised set of rules.

“Our branch managers are responsible for everything that goes on in our location. They make all the decisions at branch level, decide on the pricing, and determine who their customers will be,” explains Tracey Davidson. “We at head office simply support them. In return, customers feel quite genuinely that the individuals they’re dealing with understand them. More importantly, customers know that decisions aren’t made from some great distance. I think it’s very hard to make the right decision in a situation if you don’t truly understand the ability to spend time making decisions.”

The branch managers’ independence seems to pay off, in form of trust from customers. Being able to speak to someone who knows who they are – and more importantly, understands their business – is a crucial point for many business leaders, who have grown scepticism towards big banks that are based on centralised decision-making.

Adam Landau, director of DeVono Property, represents the view of many business leaders who have become frustrated with high street banking, when he says: “I think the biggest bank problem is that they have become too big.” Like many others, Landau is sceptical that the challenger banks will make a difference in the funding landscape. “Metro Bank and others are trying to be a lot more open, but if they actually do what they promise, I’d be surprised. Service will always fall away when a bank grows.”

Is it inevitable to become a centralised institution, for any growing bank? Metro Bank is still small, only two years after its launch, but they plan to have opened 30 stores by the end of the year and 200 stores by 2020. That will, they estimate, mean some one million customers and 5,000 employees. How will they ensure to keep the relationship banking model working?

“We’re asked this a lot and I think this is where the culture comes in,” Oakley says. “We want to make sure that the leaders we have now are the leaders that will grow with the business. We have amazing assistant store managers, who understand the culture and represent it in their store. It’s getting the right people, and making sure they understand and share the culture. If we always make sure we recruit the right people, then we can’t go wrong.”

Co-founder Vernon Hill led 550 stores in the US before Metro Bank was started. The ethos they were all built upon, so Oakly, stayed the same.

Similarly, Handelsbanken’s approach has been around for many decades – it still is the way banking is done in many European countries, such as Germany and Austria, where bank branches are treated almost as individual institutions. Having grown up in Austria, I can confirm that that’s not the magic recipe for perfect banking – but it’s arguably more trustworthy than the centralised approach.

Davidson says that the branch managers in Handelsbanken’s 137 UK branches jealously guard their responsibility to micromanage “their business”, and the satisfaction that comes with being trusted to do so. Remarkably, Handelsbanken pay no bonuses or commission to staff and the terms of loans, mortgages, savings and current accounts are all decided at the branch.

“How can you ask employees to make the right decision for the customer and the bank if they are financially rewarded for one thing or the other?” Davidson asks. “We felt you shouldn’t tie a bonus into everyday activities, and our employees are very comfortable with that.”

The new breed of banks offer local decision makers and face to face interactions. Is this, a move toward localised banking, the way to a healthier lending landscape?

For that it will have to generate trust and a sense of continuity, the two things missing the most in bank lending for business right now. Knowing that the person you speak to will be the one who makes all decisions about the funding for your business may not make the terms any better or the bank more trustworthy, but it will make the process more transparent and flexible. Whether that’s enough, you will decide.

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