The small business (SMB) banking sector continues to endure seismic disruption from many angles. In the U.K., regulators are cracking down on big bank misconduct against small firms, while simultaneously exploring ways to inject competition into the sector via initiatives like the RBS fund.
At the same time, small businesses are caught in the crosshairs of wanting digital services while continuing to value in-person interactions at the bank branch. Industry consolidation, and the refocusing of investments on digital tools, however, is shuttering bank branch doors, a signal to small business owners that they can’t have it all when it comes to banking.
The bourgeoning challenger bank community in the U.K. wants to challenge that signal, though. AlbaCo is one FinTech hoping to emerge as an as-of-yet-unnamed challenger bank in 2020, according to Iain McBride, the company’s current program director and upcoming operations director (once the bank goes live).
In an interview with PYMNTS, McBride outlined the particular small business banking pain points that the company will aim to address, and challenged the notion that small businesses rely on the physical branch for advisory services.
A Narrow Focus
According to McBride, the company will operate in the small business finance space by offering SMBs loan products (with loans secured against assets). While the bank will accept deposits, the firm will not have physical branches or deal in cash, he explained, allowing AlbaCo to focus on the issue of the ongoing gap in funding for U.K. small businesses.
“The funding gap is preventing businesses [from realizing] their full potential, which might include their growth aspirations,” he said. “This is ultimately preventing them from maximizing their positive economic contribution.”
While the U.K. government has taken measures to address that gap, McBride said that more can (and should) be done.
The company’s plan to operate as a digital-only bank is a growing strategy in the SMB challenger banking sphere, reflecting a younger demographic of entrepreneurs and increasing expectations among bank customers of all types for more sophisticated technology.
However, some experts have raised concerns that small businesses still like to visit physical bank branches, largely as they seek advisory services from humans at financial institutions that automated technology may not always be able to provide. J.D. Power research, published in October, found that, in the U.S., satisfaction ratings were significantly higher for small businesses with banks that offer an account manager who operates as a “trusted advisor.”
That may not be the case in the U.K., though, said McBride.
“It’s not for banks to advise their customers on their business strategy,” he said, adding that he has not seen evidence of the trend of small businesses expecting more advisory services from their banks. “What banks can do, however, where there is a borrowing need, [is use] their expertise in lending, and knowledge of the customer’s business, to construct tailor-made, flexible finance packages that suit the customer’s individual requirements.”
That could mean adjusting a financing offering for a company that sees significant seasonal fluctuations in sales, for example, or designing custom repayment plans or staggered draw-downs based on a small business’ industry.
Bank Branch Closures
While the U.K.’s small business banking sector may look different from that of the U.S., both markets are seeing industry consolidation and a reduction in the number of physical branches available to SMBs.
Last year, the U.K.’s Federation of Small Businesses (FSB) National Chairman Mike Cherry deemed bank branches as “vital” to the health of small businesses, particularly in rural areas. The remarks were made amid calls by U.K. consumer advocacy group Which?, which released data that found the U.K. has seen nearly two-thirds of bank and building society branches shuttered in the past 30 years.
While small businesses may not need these physical branches for advisory services, McBride acknowledged that branches can be important for some small firms.
“This depends on the nature of the business, the specific demands of each of those businesses and the willingness [of] those businesses to adopt newer, potentially cost/time-saving ways of working,” he said, adding that many small business products offered by a bank “don’t necessitate a physical branch visit.”
Small firms that remain heavily reliant on cash are likely to need a physical branch. Others in search of capital can often find greater efficiency in the process by researching, searching and applying online.
What’s more, McBride noted that a lack of physical branches does not constitute a lack of relationship between small business and financial institution. Indeed, that relationship remains critical, even if it is migrating online.
“I believe it’s beneficial to not only the borrower, but also the lender, to build a relationship with that customer, really understand that customer’s business and commit to helping them with their business journey, if that’s the right thing to do,” he stated.
That goal will be one of the focuses of AlbaCo’s bank as it prepares for launch next year. In the meantime, McBride said the firm continues to search for the appropriate core banking infrastructure and cloud partners, and pursue additional funding.