Are the Big Five banks prepared for SMEs to get more demanding about financial services?

By Jim Stringer

The 5.7 million small or medium enterprises in the UK largely make business banking decisions based on habit.

Indeed, sole traders, who account for 60 per cent of all SMEs, often default to the institution they use for their personal banking. Some don’t even bother with a dedicated business account.

At the same time, 61% of small businesses aged 10 years or over have banked with the same account provider for more than a decade – while 70 per cent of small business owners think that “all banks are more or less the same”.

Thanks to this indifference, the big five banks have 88 per cent of the bank accounts through which SMEs pass their combined £1.9 trillion turnover annually.


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Is it any wonder that high street banks have done little to improve their business banking offer to these clients, when deep-rooted inertia serves them so well?

Now, however, things are changing. In recent research we uncovered a subtle shift in the direction of travel towards the financial future of SME banking – a shake-up brought about in part by the advent of open banking at the beginning of the year.

We’re seeing the emergence of a new generation of tech-enabled financial services providers. Unencumbered by the baggage of the ‘banking business’, they’re entrepreneurial, open-minded and (more importantly) finely tuned to what small business owners actually need from their finance management partners.

It’s going to get a further push when Royal Bank of Scotland finally allocates the £750 million fund to improve the provision of banking services to SMEs, which it was ordered to set aside by the government following its £45 billion taxpayer-sponsored bailout in 2008. This fund is to be given specifically to fintech partners, with the aim of developing technology to support the business banking needs of the future.

This is a significant move for entrepreneurs. While high street banks have traditionally positioned themselves as the stable, low-risk option for managing your finances, fintech start-ups are challenging the status quo.

What business owner doesn’t identify with the idea of the ‘little guys’ taking on the business Goliaths? And by facing down the old guard, start-up fintech brands are effectively engaging SMEs by saying ‘hey, we’re just like you!’

The fact that SMEs want flexible, convenient banking, makes fintech solutions an attractive proposition, especially for sole traders for whom an app and a credit card gives them the simple solution they crave – plus the ability to bank when it suits them, from the ‘comfort’ of their own phone.

Add the ability to have your accounts updated or uploaded automatically as part of the ‘banking’ experience and being able to monitor and manage your finances in real-time, and you have another example of where the Big Five struggle to compete.

A great case in point, is Counting Up, which combines banking and automated accounting into a single smartphone app designed specifically for sole traders. It updates accounting records automatically, as you make payments and receive income, so your books are always current – which removes the risk of errors and potential fines for filing your taxes late.

Fintech challengers are also able to provide a highly personal level of service that will transform the customer experience – and Coconut is one of the businesses seizing this opportunity.

It offers the first bank account designed around the needs of freelancers and the self-employed. Not only does it promise to help them ‘manage tax, stay on top of expenses and get paid on-time’, Coconut also mirrors the attitude of its customers when it says that they ‘solve the biggest money problems we face when we work for ourselves’. And in doing that it occupies a space that the old-school banks can never credibly lay claim to.

Both Counting Up and Coconut are models that recognise specific needs of small business audiences and address these by making people’s lives easier on a very personal level. After all, your average small business owner would rather be getting on with what they’re good at, than managing financial admin.

And herein lies a key part of the issue. Technically, the term ‘SME’ covers everything from a sole trader to a company with 500 staff – but a desire to lump them together with a one-size-fits-all offering lets all parties down.

You don’t have to be a banking specialist to know that their financial services needs are very, very different. In fact, there’s a strong argument for rethinking the use of the term ‘SME’ as a catch-all for what is the vast majority of UK businesses.

The problem is that your average high-street bank is neither flexible nor nimble enough to adapt to an increasingly diverse range of requirements – which is where fintech challengers have the upper hand.

The problem for emerging fintech providers is that they’re competing against the multi-million pound marketing budgets and sheer brand power of the Big Five.

So, if the new digital generation is going to really shake up the market, they need to become more than just a zany name and an attention-seeking logo. True brands stand not for slick technology, but for the promise that the technology can deliver.

This needs to be built into the DNA of the business and communicated clearly to customers.

At the moment, fintech has the brains and banks have the brands. But if the big banks want to retain their place at the top of the tree, we’re predicting they will have to start acquiring some of the fintech ‘magic’.

Our deep-dive into the rapidly evolving SME banking sector has been eye-opening. It’s clearly a market in reluctant flux – dragged towards the future by the twin forces of customer demand for greater flexibility, control and immediacy and the innovative entrepreneurial attitude of fintech brands seeking to put that control at SME owners’ fingertips.

The move away from mainstream banks is, to be fair, a trickle now. But it’s a trickle that will become a torrent. The good news is that it’s not too late for existing providers to innovate to better serve their customers – either directly or via partnerships with new entrants.

Jim Stringer is Creative Strategist at business-to-business marketing agency gyro and author of their whitepaper Fast Forward to the Financial Future: Are Financial Brands Ready for the Changing World of SME Banking?