Mark Sismey-Durrant, CEO Hampshire Trust Bank
With the dust settling from the UK general election and the new Conservative government now in place, much focus will be on the delivery of the manifesto pledges over the coming years.
For potential start-ups and small to medium-sized enterprises (SMEs) seeking funding for their businesses, the commitment to triple the number of start-up loans to businesses to 75,000 will be of particular interest and will throw the spotlight on the UK banking system.
Here, Mark Sismey-Durrant, Chief Executive Officer of specialist challenger bank Hampshire Trust Bank, discusses what it means to be a challenger bank operating in this highly concentrated market, how challengers are already helping to fill the void in lending to this important community and the ongoing requirement to foster competition in the sector.
Financing the future
The financial services sector has huge influence over the fate of the UK economy and will continue to play a vital role as the elected government seeks to eliminate the deficit. However, the UK market has traditionally been dominated by larger lenders who between them have controlled the majority of the personal current account market and small business bankingsector.
In 2014, the Competition and Markets Authority (CMA) announced an inquiry in to the banking sector that would investigate the supply of personal current accounts and of banking services to SMEs, the results of which could lead to a major shake-up of banks’ current accounts and small business lending in 2016.
While some may welcome the review, the Centre for the Study of Financial Innovation’s (CSFI) annual Banking Banana Skins 2014 survey¹, produced in association with PwC, revealed the overwhelming message from respondents: that the weight of increased regulation and political interference has become excessive and could dampen economic recovery and growth.
Regardless of the consensus, this much anticipated economic improvement will be largely dependent on SMEs, who are the lifeblood of the UK economy, representing the most exciting area for new and innovative ideas and accounting for almost half of all private sector turnover2. Business performance and economic growth among this group depends heavily on one vital component – access to finance and capital, which is why it’s more important than ever that this market concentration be addressed to enable SMEs to confidently access competitive rates and products that meet their precise needs.
It is these needs which have, in part, led to the emergence of alternative funding providers in the UK such as challenger banks. Indeed, the regulatory and political efforts to inject competition into the banking sector have paved the way for a number of new start-ups in the past few years, and it has been a hugely encouraging time for the likes of challenger banks, with two successfully achieving IPO in the last few months alone.
The emergence and success of challenger banks not only demonstrates the long-standing requirement for something beyond the dominance of larger banks in helping to drive sustainable lending and economic growth, but has also crucially helped to foster competition and improve choice for customers and small businesses.
Certainly, we know from our own customers that the ability of challenger banks to offer specific lending products such as asset and property finance and a more personalised service underpinned by expert staff is an increasingly attractive proposition. Add to that the fact that major barriers still remain such as small businesses being unable to meet the strict criteria set by larger banks, and it becomes evident that challenger banks are fulfilling a vital role in plugging the funding gap and helping to drive growth among this community.
This success can also perhaps be attributed to the flexibility that challenger banks offer in contrast to larger lenders. Our view is that providers must not be prescriptive – every SME customer should be treated as an individual and assessed as such and the success of a challenger bank depends largely on relationships. As an SME ourselves, we understand the limitations of smaller and early-stage businesses and this has unquestionably enabled us to better understand the bespoke requirements of our customers.
Knowledge is power
The reality is that there has been a seismic shift in the way SMEs can access capital, and there is increasing recognition about the real relevance of new entrants to the financial services sector. Positively, government is already acknowledging the contribution and value of alternative lenders such as challenger banks, an example of which is the Small Business, Enterprise and Employment Act introduced by the UK Government’s Department for Business, Innovation & Skills, designed to pave the way for businesses to get improved access to finance.
What we continue to face is an educational challenge among SMEs as to the alternative finance options available to them, prevalent given that 70% of SMEs seeking bank finance approach only one provider, and 90% stick with the provider of their current account.
While government needs big banks to succeed, the focus must be on how the banking community continues to respond to the changing requirements of its customer base, by appealing to them with more suitable propositions and diversifying their product portfolios accordingly.
As one of the few new entrants to the sector to have successfully achieved authorisation in 2014, I can attest that as we pass our first anniversary, smaller banks are certainly leading the way and stepping up to the challenge, and with economic growth remaining the byword of parties and business leaders alike, it will be interesting to see the shape that growth takes over the coming years.
Should the CMA inquiry lead to a fragmentation of the UK banking system, there is every indication that challenger banks will continue to play a vital role in fulfilling the demands of this important demographic. Alternative finance is, and will continue to be the bedrock of UK business growth, and challengers are here to stay.
- April 2014 – CSFI’s Banking Banana Skins 2014
- 26th June 2014 – British Business Bank ‘The business finance guide’