Offering niche banking products that serve the unique needs of SMEs is one way in which new entrants to the opening up UK banking industry can differentiate themselves and attract customers, a recent article from L.E.K Consulting highlights. With regulators looking to increase competition in the banking industry and the inherent difficulty of entering the market as a new bank, focus on niche rather than broad retail offerings provides the best route forward for entrants according to the consultancy.
Banking in the UK has been a traditional affair. Upstarts have long had difficulty making headway in retail and corporate banking. It was only in 2010 that the first new high street bank – the Metro Bank – in over 150 years, opened its doors. While the Metro Bank may be a long term challenger the dominance of the four big banks – Lloyds, RBS, Barclays and HSBC – the UK government is seeking more competition in the banking industry, with recent moves from the Competition and Markets Authority seeking to level the playing field for new entrants by opening access to payments infrastructure at a reasonable cost as well as create more competition in bank products.
As it stands, 26 new entrants have applied for banking licences while six have been granted since 2013. Yet considerable challenges remain, such as IT, although the rise of off the shelf technology and cloud based solutions is paving the way for easier entry into the market. Ultimately one of the most important challenges, and potentially least intractable, is attracting customers to the offerings of the new institution. The big four still control 77% of the UK personal current account market and 85% of small and medium sized enterprise (SME) business current accounts.
Making inroads in the traditional domains of the big banks will be difficult, yet good opportunities exists, notes a recent article from L.E.K Consulting. The authors, London-based Diogo Silva and Peter Ward, highlight that one area for which big banks have a blind spot is the SME market. With big banks generally focusing on large corporate customers and with a product-centric approach the UK SME banking demand is in their view “underserved”.
SMEs present an attractive niche market, and currently has an estimated aggregate lending market valued at £160 billion (outstanding balances as of October 2014). With the size of the market large enough to warrant specialised banking services, and the growth fundamentals for the sector good, new entrants may be able to capture and adequately serve the SME market by providing specialised services and products that focus on meeting the unique of specialised needs of various sectors.
With large banks generally focused on large customers, their client managers often lack detailed and comprehensive knowledge of the fundamentals that SMEs face in their growth trajectories for their specialised industry. Big banks then often end up offering generic products that may lack the sophistication to support the different lifecycle stages SMEs are in as they seek to scale up and grow.
L.E.K Consulting finds that the lack of sophistication offered by big banks for SME customers, provides clear ways in which new entrants to the banking sector can differentiate themselves and their offerings. One of these is to offer client managers that have expertise in the field of the SME and thereby can accurately assess their needs. Agriculture, real estate, financial services and healthcare are examples of sectors with specific customer needs, which are often not addressed specifically. Another way to differentiate themselves is through offering financial services that address the relevant life stage of the SME, with the early stages of the development of businesses needing careful incubation and support at key times, a more targeted and wide ranging portfolio of products may attract customers.
“A strategy in which an analysis of the needs of SMEs in specific industries leads to products and services designed to meet those needs. Challenger banks need to identify the industries and corporate life stages in which SMEs are significantly underserved. The challengers that can do this can create sustainable businesses capable of generating attractive return on capital for their investors,” write Silva and Ward.
While specialised banking is one way in which the SME market can be served with financial products, a recent study from EY highlights that whole new platforms and ways of financing businesses are appearing, with the development of an alternative finance market in the UK for peer-to-peer business lending up from €81 million in 2012 to €998 million in 2014 at an impressive 253% growth rate. In the most cases start-ups and SMEs are the beneficiary of this form of finance.