Where Finance Finds Its Future

The banking industry in the United Kingdom is so consolidated that it is not surprising the Treasury and the Bank of England identified competition as the most urgent need in the wake of the great financial crisis of 2007-08.

Metrobank has had a banking licence for more than decade now. Monzo (2015) and Starling Bank (2017) are the best recognised followers and fellow banking unicorn Revolut (2015) finally applied for a banking licence in January 2021.

If the multifarious payments and other apps fostered by the Open Banking initiative launched in January 2018 are added – there are over 300 of them – the United Kingdom retail banking market looks highly competitive.

In reality, it is not. The Big Four banks (Barclays, HSBC, Lloyd’s and RBS) still own 75 per cent of current accounts. The same is even more true of small and medium-sized businesses (SMEs). The Big Four own 85 per cent of business accounts.

An Open Banking Initiative survey of 500 SMEs, published in December 2020, found half were using open banking providers, but only because the Pandemic necessitated on-line banking service. Less than one in five (17 per cent) even of these SMEs had also switched their bank account.

The Bank of England has identified a funding gap of £22 billion for the 5.94 million SMEs in the United Kingdom, which currently obtain 84 per cent of their debt from banks. Few are able to shop around. In fact, one reason SMEs do not change their bank is that their chances of being rejected for a loan by a new provider are 50 per cent higher.

Unlike Germany (which has more than 400 full-service Sparkassen savings banks and more than 1,100 full-service cooperative Volksbanks) or the United States (which has 5,700 full-service community banks and more than 5,600 credit unions with assets of more than £1 trillion), the United Kingdom is dominated by publicly listed banks.

The first signs of structural change have now appeared, in the shape of new banks that believe they can lend with confidence to SMEs on the basis of tacit (and often local or regional) knowledge as well as the increasing volumes of hard data available in a rapidly digitising economy.

In theory, new banks with a good understanding of how to lend to SMEs will not only increase the supply of credit to SMEs, but increase the resilience of the banking system as a whole by broadening the size and type of bank, and make the structure of banking less pro-cyclical.

This Future of Finance webinar will explore with the leaders of some of the new banks, and with experts from countries with more diverse banking systems, whether it is not technology and data alone, but local and regional knowledge and relationship banking, that can build a more resilient, responsive, stable and innovative banking system for SMEs.