Linking Challenger Banks to Digital SME Lending

Small and medium-sized enterprises (SMEs) in the UK have traditionally turned to large lenders for all of their financing needs. The highly publicized advent of challenger banks is reshaping this dynamic, and it is crucial for incumbents to invest in their digital services in order to remain competitive and retain market share.

Lending to SMEs in the UK is generally dominated by five major banking groups: NatWest Group, Lloyds Banking Group, Barclays, Santander and HSBC. These brands are household names, familiar to small businesses across the country.

however, new research from Marqeta revealed that 84% of UK SMEs have become frustrated with their current lending experience, with 90% demanding more digital services to help them navigate the complexities of the COVID-19 environment.

Main Street banks are under pressure to deal with SME customers during the pandemic with multiple loan applications denied, although businesses are eligible for funding. The UK banking and financial sector has been overwhelmed by applications and has only supported around 27% of UK companies through government-backed coronavirus loan programs, nearly a year since their inception.

Small business owners are losing faith in the UK’s biggest banks and increasingly considering switching their businesses over to the multitude of digital challengers.

It’s a trend that started before the pandemic. A 2019 study by the British Business Bank, for example, found that among those who contacted funding providers other than the ‘Big Five’, 20% had contacted a challenger bank.

Challenger Banks have launched innovative business banking proposals over the past two years, further raising the expectations of SMEs. The CEO of one of the biggest challengers optimistically believes they
will hold 18% of the SME market in just five years.

Towards digital

The Marqeta study highlighted that more than two-thirds (67%) of UK SMEs are now considering finding a new supplier if their current bank is unable to quickly deliver better digital capabilities.

In addition to lengthy loan decisions, nearly a third of SMEs are frustrated by the difficulty of integrating business bank accounts with other systems such as accounting. They are drawn to the possibilities offered by new cloud banking solutions.

Challenger Banks are setting new standards of excellence in customer experience, speed and lower operating costs that all other financial institutions must match to stay competitive. The intelligent use of data and decision analysis reduces decision times and operating expenses while improving the accuracy of risk management.

If incumbents don’t act now to improve their existing digital services, they risk losing a vital revenue stream as customers turn to other providers with better deals. We are successfully helping a number of European banks to tackle this digital challenge, for example Intesa San Paolo, which now has an industry-leading digital lending platform.

The digital transformation required by incumbent financial institutions to remain competitive can be costly and time consuming due to the scale, complexity and rigidity of their existing systems.

It is understandably easier for bigger banks to spend more on digital transformation to match the breakthroughs of challenger banks and to meet the growing demand for digital channels caused by the pandemic.

But that’s a different story for Tier 2 and Tier 3 financial institutions which are now losing market share to both the challengers and the big banks that have been pushed into action. To stay competitive, they must quickly implement affordable solutions that improve the customer experience, speed up decision-making and lower their operating costs.

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