Why businesses should feel encouraged by the challenger bank movement

One Savings Bank revealed that its loans and advances rose 13 per cent in the first half of 2014 to £3.4bn due it said to increased lending to SMEs. Total new lending was up 78 per cent to £649m comprising residential mortgages and SMEs.

Aldermore told a similar tale with its lending to SMEs up by £270m or 12 per cent to £2.5bn in its first half.

“We’re excited by the significant ongoing growth opportunity presented by SMEs and homeowners, who we believe continue to be underserved by the wider market,” it said.

“Our track record and the great customer feedback we receive demonstrate that we’re exceptionally well placed to continue to support these customers and grow the business.”

Triodos Bank which lends to sustainable/renewable energy projects also saw its lending grow by nine per cent over the period in the UK.

The figures show that challenger banks are continuing to throw down the gauntlet to their large high street rivals.

According to a recent KPMG report The Game Changers, UK challengers are outperforming the ‘Big Five’ banks – Barclays, HSBC, Lloyds, RBS and Santander – in small business lending, invoice financing, unsecured lending and second chance mortgages.

Challengers have increased lending by 16 per cent, compared to a decline of 2.1 per cent by the ‘Big Five’ in 2014.

KPMG cautioned that the combined loans of the five largest challengers were still just five per cent of the Big Five’s loan books but nevertheless said they were “picking-up the white space left behind following the financial crisis”.

Read more on challengers:

• Crowdcube’s CEO Darren Westlake on the trials and tribulations of launching a challenger brand
• From Metro Bank to Mondo: A look at the prospects of Britain’s challenger banks
• OakNorth Bank gains licence and aims its proposition firmly at SME lending

Part of the small size of their lending books is down to their newness in the marketplace, still some scepticism amongst SMEs nervous about leaving the familiarity of the big banks and a general lack of awareness.

One SME financial director told me recently that during a recent funding round the thought of talking to a challenger bank never cropped into his head. It was only when that challenger bank made an approach to him did he decide to ‘give them a try’.

He was so impressed by their commitment, energy and willingness to understand every aspect of his business and where his needs were not being met that he give them his business.

Two challenger banks I spoke to admitted that they had to “get their name out there more”. Another said that 70 per cent of SMEs when seeking bank finance approach just one provider with 90 per cent sticking with their current lending provider.

SMEs have to wake themselves up from such inertia. They can’t be like a household which pays no attention to the changes in their gas and electricity bills and shrugs their shoulders at suggestions that there could be cheaper or better alternatives elsewhere.
Fear of the unknown can cost you valuable money.

A well known energy supplier, outside of the Big Six, told me recently that one way he thinks his company, itself a challenger in the energy sector, could really take on the main players would be to ask the Government to legislate for every provider to list their rivals prices in monthly letters or emails to their customers.

He explained it would just be a simple piece of communication. An outline of the money the customer is paying that month followed by a list of every other supplier and the price they are charging. To get the figures accurate there would be a free exchange of information between the suppliers about their new rates.

Something similar could be worked in the banking industry. Perhaps when the terms of a loan deal are about to end an SME would be presented by their current lender the cost and rate of the new loan deal alongside what their rivals including the challengers would lend.

Perhaps even an independently run website – a comparison site for SMEs – to help them see the best rates, for the banks to convince them and win their business and for them to find out what the whole market, not just a select few are offering.

Farfetched?

Well, it is about ensuring that UK SMEs are getting the best deal and the best relationship and performance from their lenders.

The big banks should be made to work for their business. If an SME sees so much difference in a challenger bank at one meeting that they are prepared to end a decade or more long relationship with a high street player then more SMEs should be given the chance to see what they might be missing.

It might also sharpen up the performance of the big lenders which can be no bad thing,
The challenge for SME custom is only beginning to boil.

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