It’s often said that banking services for small- and medium-sized enterprise (SMEs) are the “Cinderella” of UK banking: underinvested and undervalued, with customers complaining of a lack of choice and differentiation. We’ve just undertaken some research that casts an interesting light on these gripes—and also on the recently announced RBS Remedies package.
Can the “switching fund” achieve its aims?
At first sight, our findings seem to suggest that the RBS Remedies will struggle to achieve their goal of boosting competition and getting more SMEs to switch banks. But a closer look points to some potential benefits from the Remedies in the longer term, springing from the increased focus and investment they’ll generate in business banking.
So, what did our study reveal? Our research among 1,000 SME banking customers across the UK found that almost 60 percent wouldn’t consider switching to a less familiar start-up or challenger bank, even if this meant receiving better service. Also, three-quarters said they were unlikely to switch banking providers in the next twelve months. And 41 percent felt it was important to be with a trusted and established financial brand, casting further doubt on their readiness to switch.
Is the SME market big enough?
Meanwhile, other findings from our study suggest that the UK SME market may be expanding too slowly to sustain new entrants and incumbents over the next three years. Based on SMEs’ growth rates over the past five years, there will only be one million addressable accounts up for grabs by 2022. This isn’t a big enough market to support lots of banking players.
What’s more, SMEs that don’t employ any staff are likely to account for most growth in the market. Non-employing firms—many of whom may be participants in the “gig economy”—accounted for 79 percent of the overall increase in the SME population between 2016 and 2017, and 89 percent since 2000. Given ongoing shifts in employment patterns, this trend is likely to continue. Non-employing firms’ requirements tend to mirror those of primary personal account users, and don’t usually extend to a need for business borrowing.
The awards: surprising choices…
It’s against this background that Banking Competition Remedies (BCR) has announced who’ll receive the first three tranches of cash being handed out to support investment in SME banking services. The origins of the Remedies date back to the UK Government’s bailout of RBS in 2008, after which RBS was told to pay £775m to fund competing banks’ SME services.
While the winners of the first round of Remedies funding have sparked surprise in the industry, the BCR’s decision to allocate the cash to new players does underscore its determination to shake up the commercial banking market for SMEs. Also, the injection of funds will be a lot more meaningful for the likes of Starling and ClearBank than it would be for an incumbent such as Clydesdale, which is already investing significantly in this space.
There’s every chance that the increased focus on SME banking…will boost investment
Metro Bank—despite its recent well-publicised challenge around its loan bank risk management—has taken the lion’s share of the money, perhaps reflecting its second place in the Competition & Market Authority (CMA) rankings on overall service and quality. It has undertaken to double the BCR’s funding with its own investment and open 30 branches in the north. Starling plans to supplement its mobile banking app with an online portal, while ClearBank will partner with digital bank Tide to enable customers opening a current account to carry out company registration as well.
…may give investment a boost
With annual switching rates in the SME banking market currently running at just 4 percent, the BCR is hoping the awards will spur investment, competition and choice in SME banking services, thereby encouraging significant numbers of business customers to change banks. There’s widespread scepticism that the handouts will succeed in significantly disrupting the business banking market in this way—and these doubts may appear to be reinforced by our research findings.
However, despite the misgivings being voiced in the press about the Remedies package’s short-term impacts I think it brings encouraging implications for SME banking as a whole—and therefore for SMEs. While the BCR’s ability to achieve its immediate objectives is in doubt, there’s every chance that the increased focus on SME banking that it’s generating will boost investment in this area. And in the longer run, more investment should translate into better banking services for business customers.
Incumbents have no room for complacency
As our research underlines, dramatic short-term shifts in market share are going to be very difficult to achieve. But, largely as a result of BCR, the focus on commercial banking today is the most intense I’ve seen in a decade. This is very encouraging and suggests that the incumbents in SME banking shouldn’t let low switching rates lull them into complacency.
While strong customer loyalty and unconvincing switching incentives may make winning over SME customers seem an impossible challenge, SME customers’ growing demand for digital services means the challengers could yet threaten the established business banking relationships. Put simply: the game is on.
Keep an eye out for our research report on SME banking over the coming weeks. In the meantime, feel free to contact me if you have any questions.
Good article. My observation is that there is significant room to grow the market, but it primarily comes from small business customers that currently use consumer financial services for their business needs. Examples are the large numbers of small firms that use personal credit cards to fund their business, or small firms that mix their personal and business current accounts. However, a key point is that addressing either opportunity doesn’t require a bank licence! It could equally be accountancy software providers or pre-pay card providers that dominate the micro-business segment.
Thanks Conrad. It’s definitely true that, historically, small business owners have often used retail product for business usage (maybe even up to 30% of SMEs do this), which clearly is not the right answer for either bank or customer. Interesting point that there are other non-banking licence alternatives for SMEs – again, agree, although of course with those options often come other variables to consider such as rates, access etc.. Appreciate you engaging on the topic. Keep the thoughts coming!