Ten years on from the financial crisis, much has been written about the banking sector’s response to the turmoil across global markets, economies and financial institutions. In the UK, the government’s bailout of Royal Bank of Scotland marked a watershed moment and forced the City to examine itself.
In 2014, as part of the ongoing recovery effort, RBS was mandated to divest its branch-based retail and small and medium-sized enterprise (SME) business, which later became known as ‘Williams and Glyn’. Subsequently, the UK government proposed substituting the 2014 commitments with an ‘alternative remedies package’, aiming to promote competition in the SME banking segment. This £775m fund has transformative potential for UK SMEs.
A resilient segment
UK smaller companies have demonstrated remarkable resilience since the crisis through a decade of austerity. This segment now generates an annual turnover of £1.9 trillion for the UK economy and is at the cutting edge of innovations reshaping industries and employment patterns in a connected age.
In the retail and investment banking space, banks continuously hone and refine their offering to meet the needs of their customer base, from servicing major institutions through to the mid-market.
Despite being such an important segment, SME banking needs have not been met in the same way historically and for all their innovation, entrepreneurship and rapid growth, smaller businesses continue to be serviced by non-specialist advisers. In 2017, micro-SMEs accounted for 90 per cent of active companies and 15 per cent of total turnover across business banking segments. This proportion will only continue to rise as the raft of government initiatives to protect and promote smaller businesses, brought in since the crisis, reach maturity.
SMEs are often referred to as a single category, but beneath this label, the depth and diversity of the client base demands a highly specialised approach. Banks need to put SME customers back at the heart of their business and devise new product and service offerings which cater for each stage of companies’ journeys. Many small businesses rely on digital platforms to access their customers and so would reasonably expect to be equipped with online funding, reporting and advisory services specific to their circumstances.
Seize the chance
Flexibility is key for many businesses at the start of their life cycle and the sector needs only to look across at Amazon, which has begun to offer its small business customers access to loans on its platform, to gauge the competition already out there in the market. Challenger banks and more established participants should also take heed of the rise of crowdfunding, microloans and peer-to-peer lending, which have emerged in the SME space.
In November applications opened to eligible UK challengers seeking to access a portion of the £775m remedies pot, awards which are due to be announced and distributed from February 2019. A shortlist of 11 institutions that qualify to join the funding scheme was announced in December, with Santander, Clydesdale and TSB joining challenger banks on the list. As newly-funded competitors use their ‘winnings’ to enhance SME offerings, the big banks, who in the main are ineligible for this funding, must also seize this chance. With trust between SMEs and banks hurt by recent allegations of poor treatment and in a period of heightened uncertainty for UK financial services and indeed, the country, banks must ensure they deliver the specialist service requisite to this burgeoning segment of the economy.
Dan Cooper, Partner and Head of UK Banking, EY
EY is holding a Future of SME Banking event on the 24th January and will include UK Finance speaker, Stephen Pegge, Managing Director, Commercial Finance. If you are interested in attending, please find further details here.
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