We have all heard of the so-called "challenger" banks putting a dent in the dominance of the UK’s Big Four. The new players are often leaner, faster and more specialist than their bigger brethren. They have other major advantages, argues John Lunn
The new start-up and challenger banks in the UK are aiming to pick off chunks of the traditional banking offer and perform them far more efficiently, without decades old processes and creaking heritage IT systems holding them back.
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But this is not the only reason these fresh faces are changing the game. The problem is not just one of more agile organisations swiping customers and services from established players.
A surfeit of caution among the bigger banks is creating gaps in the market that are ripe for newer businesses to take advantage of. It’s not just a question of size and agility, it’s about the decision and confidence to react to the changing world.
This can be illustrated by looking at the issue from a market perspective. It’s a fairly well acknowledged fact that if the UK wants to maintain its place as a global player in terms of developing, launching and exporting goods and services it must embrace small and medium sized businesses (SMEs).
While many large businesses continue to crawl their way out of the recession, a number of SMEs have embraced the opportunity to create new and different products, filling a market void. Much like the challenger banks themselves, they can leverage their agility, innovation and entrepreneurial flair to establish credibility. In some cases this has been offering an alternative choice, in others it has been about offering something new that customers need and want.
Cash is the oxygen for any business, and especially for these SMEs. Without this, they cannot invest and establish a credible presence in the market. But as banks revisit their portfolio of products and batten down the hatches in an attempt to reduce risk – and consequently further exposure to regulation and severe financial penalties – lending to SMEs all but shuts down.
Of course, a sensible and robust approach to managing risk is essential. But this must be balanced by pragmatism and tempered with the recognition that a portfolio of lending that includes SMEs is required to support wider economic development. This reticence has gone so far as to result in legislation being tabled to force larger banks to amend their lending policies.
It’s not hard to see the problem from the larger banks’ point of view. Financial service institutions remain distracted as they try and avoid the potential impact of further regulation. As repeated studies have shown (our own research among senior leaders at UK FS organisations included), financial organisations are struggling to cope with a myriad of complex regulatory pressures from markets and countries around the world.
While the need for tighter regulation has been established, the danger of this is that it drives the banks focus away from the customer and creating new products and services to meet their needs.
The focus on simplification delivers a bank that is easier to run, but potentially as the expense of products that meet the needs of SMEs. FS organisations must adopt a more strategic approach to tackling regulation that also allows them to grow the business elsewhere; and an approach that understands what regulators are trying to achieve.
The PPI scandal still looms large over the industry. Lloyds alone is facing a bill for £11bn to cover PPI, the same amount it costs to host the Olympics in London. This encapsulates the problem regulators and industry watchdogs are trying to tackle. Banks must put the customer back at the heart of everything they do, not just focus on making the bank easier to run
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By GlobalDataIf this caution continues to be the case, there is a real risk that banks’ market offering and customer base will contract to the point that the impact of regulation on their business could be negligible; in the absence of products and services there will be no customers and in the absence of customers there will be no business.
Where does that leave SMEs? While there has been an increase in crowdsourcing and peer-to-peer lending, there is still a problematic gap between supply and access to this funding.
Non-traditional global players have also entered this market and made some bold moves in filling the lending void. One prime example is eBay; an SME which has been able to capitalise on an existing sales infrastructure and channel to market whilst accessing funding loans that can increase the oxygen in their business. It is this kind of innovation from organisations outside of the traditional FS industry that is filling the whitespace opened up by the inertia from established financial businesses.
Whilst larger financial organisations do not have the same infrastructure and channel to market offering, they should – and must -be able to make more informed decisions with regards to providing the finance necessary to support economic growth through SMEs.
In the absence of this there is the risk of a cyclical and self-fulfilling dilemma whereby banks are so risk averse that they no longer provide the function they exist for. In consequence, they fail not because of excessive (and in many parts, justified) regulation but because they have haemorrhaged their customer base by failing to offer what customers need. A warning from another sector is the way that Amazon has turned from being one of Royal Mail’s largest clients to one of its biggest competitors.
In a buoyant market the focus must be on risk management as opposed to risk aversion. Striving to develop a balanced portfolio of lending has got to be a survival priority for FS organisations. They must learn the lessons that have gone before and with their eyes wide open move forward confidently and embrace a market that is desperate for what they have the ability to provide.
John Lunn is Executive Director and Partner at transformation consultancy Moorhouse
