How is the rising tide of the challenger bank impacting traditional lending?

Every month it seems there is a new challenger bank being advertised on the side of a taxi or bus – promising to offer consumers and businesses a totally new way of banking.

To find out how traditional banks are reacting to the proliferation of the challenger, Business Money has brought together a panel of experts.

How is technology changing the way that businesses receive bank funding?

Graham Austin: “We’re a digitally-driven yet relationship-focused bank, with the biggest branch network in the UK, which is where our business bank managers are ideally placed to meet the local needs of clients.

“We already have a class-leading mobile app for businesses, with £25k instant lending available to over 100,000 businesses at the touch of a button. Banking though is much more than an app – particularly business banking. When we first went live with these pre-assessed lending limits, we were surprised by what happened. We found that SME customers would only get so far through the online approval process before stopping and wanting to talk to somebody – even though they were one click away from getting their money.

“Businesses want to meet people and sit down, which is why Barclays has more relationship managers on the ground in the South West and across England and Wales.”

Alexandra Frean: “Technology is changing every aspect of our life – the way we shop, the way we buy music and the way we bank. When Starling was first launched, banks tried to pretend technology hadn’t happened. But it has and for the better.

“Open Banking has the potential to bring about a transformation of the sector. Implemented well, it has the potential to level the playing field, open up more financial services and, most importantly, heighten public awareness of new and more streamlined ways of managing personal finance.

“We’re already seeing the additional convenience brought to consumers through the Starling Marketplace and through our banking services business. But we’re still some way off from seeing the full impact of Open Banking.

“Then there’s artificial intelligence (AI) and machine learning (ML). To date, ML and AI have largely been used by banks for operational efficiency – to automate customer service, or to create risk-based financial models, for example. We’re changing that; we’re taking ML and AI and putting them in the service of the customer to create personalised customer experiences and tailored recommendations to best meet their individual needs.

“The banks that succeed in the future will be technology-driven.”

Paul Thwaites: “Technology is transforming the banking sector, and customers are seeing the benefits in a number of different ways. At NatWest, we are now able to use data and insight more effectively than before, which allows us to make faster decisions, and provide tailored support when a customer needs it.

“Just as technology is enabling new players to enter the personal and small business markets, it is also enabling us to develop new digital propositions such as Bó in the Personal bank, and Mettle in the Business bank. With the advantage of a large existing customer base, we have been able to gather extensive feedback on our new ventures, allowing us to develop user experience before launching to market.”

How much is your bank lending to businesses?

Graham Austin: “Barclays announced a £14bn lending fund in March as part of a series of initiatives to help SMEs succeed and flourish through Brexit and beyond.  In addition, more than 100 SME Brexit clinics and seminars have been run in local communities across the country.”

How is the banking sector continuing to change in the UK?

Alexandra Frean: “In 2018, 48% of British adults used mobile banking – up from 41% in the previous year. This demonstrates the huge shift in customer behaviour taking place in the sector. Technology is driving competition and raising customer expectations.

“Challenger banks are using technology to make banking simpler, easier, faster and fairer. Since November 2018, we’ve seen growth of 110% in our customer numbers and of 200% in our deposit base. We’ve now got over 775,000 accounts and expect to reach one million this year.

“The incumbents are being forced to stand up and take note of what we’re doing. They know they simply cannot afford to ignore how we are improving our customers’ banking experience and helping them manage their money more efficiently.

“Traditional banks are now starting to copy our features, but they can’t copy our cost base or our business model. It will be interesting to see how they continue to respond to this new wave of banking over the next few years, and how many of them will survive in the long term.”

Oliver Prill: “We see banks like Tide taking a much greater share of the SME market, which has been traditionally dominated by an oligopoly of four high-street banks, as awareness of alternatives grows.

“As part of our commitment to the Banking Competition Remedies (BCR) Alternative Remedies Package we secured in partner in partnership with ClearBank, Tide has stated it will secure 8% of the business banking market by the end of 2023. We need to maintain our current rate of growth to reach this target.”

Paul Thwaites: “New competition, regulation, and advancements in technology and digital services, are fundamentally changing the sector. Customers now have far greater choice for how they manage their personal and business banking, whether that be applying for a mortgage, starting a new business, or growing their operations.

“At NatWest, we continue to develop innovative solutions that provide customers with the flexibility to manage their finances in a way that suits them.”

How are the demands of SMEs changing how they expect their bank to operate?

Alexandra Frean: “Nobody ever started a business to spend more time with their bank manager. Today’s SMEs are looking for a bank that saves them money and time; one that is open 24/7 and can help them get the most out of new technology.

“They don’t want to wait weeks for an appointment to open an account or to chat to a bank manager who doesn’t know the first thing about their business.

“With the help of a £100m grant, awarded in February, we’ve started a four-year programme of responding to these demands. We’re building a full suite of more than 50 digital banking products that will save time and add value so that our SME customers can get on with what’s important to them – running their businesses.”