You’d have a relationship with a bank manager who you’d go and see if you wanted to raise finance, increase your overdraft facility – or had a problem. But snapping at the heels of the established financial giants are a slew of small, upstart banks that are tempting businesses away with fresh ways of thinking, slick app-based interfaces, niche offers and low (or even no) monthly fees. They also don’t tend to come with the baggage of thousands of buildings, vast payrolls, or creaking legacy systems.

For Mike Cherry, national director at the Federation of Small Businesses, it’s about time the industry got shaken up. “Injecting more competition into the small business banking space is a must,” he says. “The big four banks still hold the vast majority of UK small business customers. The key to more small businesses getting good banking deals is making it easier for them to shop around,” he says. “Too many small firms set-up a commercial account with the big bank that they’ve always dealt with as a consumer when they could be getting a more affordable option elsewhere.”

While some of these banks might appear to be minnows compared with the global financial leviathans, their customer bases aren’t to be sniffed at. One of the biggest players among the upstart banks is Revolut. Launched in 2015 and with a global customer base of between three and four million customers, its particularly useful for customers who want to use money internationally. It had less than 700 employees as of March 2019 – but to put that in perspective, HSBC has nearly a quarter of a million worldwide. Others, such as Anna, a Russian-owned bank with its UK headquarters in Cardiff, are aimed at sole traders and small businesses. It’s one which has found favour with a few small-scale printers. Like many of the smaller new entrants to the banking sector, it eschews traditional customer service routes like calling, or even going into the bank itself for online customer support. It also chases invoices, and notifies you when you’ve been paid, and in something of a zany twist, has a debit card which miaows when you use it – yes, really. “I like the fact that you can get instant customer service via messages – I really don’t like ringing up banks,” Emily Willis, a Derbyshire-based printer of merchandise, gifts and t-shirts told us.

There’s raft of others: Starling, which is mobile-only, integrates with accounting software such as Xero and Freeagent. Elsewhere, Tide is one of the leaders in the business space, offering a quick to set-up service and no monthly fees, and additional features like up to 35 bank cards for your team and the ability to see who spent what (and where they spent it). It also offers integration with accounting software, meaning that dog-eared receipts are in theory, a thing of the past. Monzo, one of the more recognisable challenger banks, has had a great deal of success with its consumer banking offering, but it’s safe to say that its business prospect is still a work in progress. However, the bank claims that more functionality is on the way, including putting money aside to pay taxes, international payments, organised expenses and payments with a link.

Prepared to innovate

For Dr Andrea Moro, reader in finance at Cranfield School of Management, challenger banks are the ones currently setting the pace in the banking industry. “Big banks aren’t innovative – they tend to react to things,” he says. “When TransferWire launched, there was huge room in the market because banks typically charged fees for international payments and the rates offered weren’t very good. This made the traditional banks revise their policies. Challenger banks are changing banking: the big banks are aware, and they are also trying to change. They’re implementing tools similar to challenger banks – but they have huge costs, and they own buildings, and huge assets and human resources which they can’t change easily.”

For Moro, challenger banks can thrive because of what they don’t have. “Banks like Monzo can be very effective – broadly speaking, they have an algorithm – they keep it maintained, and improve it. You need a good number of IT geeks – and that’s it,” says Moro.

Ricky Wood, founder and head of product design at brand new financial app Sync, is well-qualified on the subject. Having worked at NatWest on the RBS subsidiary’s mobile app, he also worked for Lloyds before jumping to Revolut, then a start-up when it launched in 2015. “The most important thing is that the challenger banks have less [internal] red tape. 

“If you speak to anyone who works in banks, there’s a lot less politics; larger corporations are ‘safe’ and some bolder ideas don’t get implemented,” he says. “Speed is on our side.” Sync’s own offer allows customers to have access and information from all of their bank accounts through one app. “The challenger banks are all very niche and the biggest banks can’t compete with that, or the fact you can open an account in three minutes,” he adds.

The new breed of banks are also changing how businesses can get access to finance. “Challenger banks also have a role to play where access to finance is concerned, especially as increasing numbers embrace Open Banking as a means to making more informed, fairer assessments of the ability of firms to borrow,” says Cherry. “Government should be doing more on this front – ensuring that as many reputable lenders as possible are brought into the scope of the Bank Referral Scheme, and more small firms are successfully referred through it.”

“Traditionally, smaller firms used to deal with banks to exploit personal relationships. You’d have a bank manager: the only possibility to offer loans and facilities was to speak face to face with a business owner,” says Moro. “The big problem is, it’s the not the most efficient way of doing things. There are increased costs – buildings, staff – and the bank manager’s time.”

“If you were to go to a mainstream bank for funding, and your request would likely go up the chain of command to London. But now even mainstream banks are moving away from the bank manager model themselves,” adds David Hillan, tax partner at the Birmingham office of Grant Thornton, the international accountancy firm. 

One firm entering the fray which is lending more is Redwood Bank. The firm, which only received its banking licence in 2017 and surpassed £100m of lending earlier this year, is targeting the SME market and is also offering business mortgages to customers.

“In any revolution there are advantages and disadvantages; it’s good to have competition between financial institutions, and I’d say for most of the population it is largely positive,” says Moro. “These new financial institutions can be supportive to business: they can make it easier to pay, and receive money, and save time cashing in cheques. If you’ve got a fairly conventional business, challenger banks are fine, but if your business is quite peculiar or niche, things can be a bit trickier. It’s not as easy to explain to an algorithm what your business is.”

Pros and cons

Moro also believes that some businesses would quite simply not suit the customer service provided by many challenger banks, particularly app-based ones. “There are negatives. Monzo for instance, while you can deal with a call centre or someone on live chat, you can’t establish the same sort of relationship between you and a bank. It’s a relationship between you and a computer,” he points out.

For Hillan, the big banks will always be able to out-gun challengers with their sheer clout. “Clearly challenger banks don’t have the same resources, and it’s difficult to match the traditional banks for financial muscle,” he says.

There are also kinks to be ironed out, it must be said. Earlier this year Monzo advised customers to change their personal identification numbers after their security was compromised. Its rival Revolut meanwhile, tops the list of complaints to the Financial Services Ombudsman among the new Fintech start-ups, with 82 complaints to the Ombudsman between January 1, 2015, and December 31, 2018. However, to put this in perspective, according to research by the Financial Times, big hitters Barclays and Lloyds received around 100,000 complaints apiece during this same time period.

“I think there are few certainties in life, but what I can be certain of is that challenger banks are going to grow and get bigger,” says Grant Thornton’s Hillan. “The space they’re operating in isn’t the high-end market – it’s the £10m annual turnover companies which are looking to grow. That’s a big space which challengers can help fill.”

So, the big question – should you ditch your trusty old ‘big four’ account and throw your lot in with a shiny new app-based bank? For the FSB’s Cherry, it really comes down to the nature of your business. “Where challengers and app-based banks are concerned, it’s about figuring out what works best for you,” he says. “If you’re consumer-facing and still have customers paying in cash, then these may well not be the right options. However, if you’re strictly B2B or have clients overseas, you could stand to benefit from an online-only account, particularly if it’s accompanied by a strong offering around international transactions.”