Building with confidence in challenging times
Bryce Glover, deputy CEO at Recognise Financial Services Ltd | 16:57 Wednesday 23rd January 2019
It is difficult to think of a time in the past three decades when the chasm between the interests of UK business and the Palace of Westminster has been more exposed than the Brexit debacle.
A masterclass in political self-interest and inept negotiation played out in full view of an international audience of incredulous voyeurs. Yet – in the financial services sector – there is a crowd of enthusiastic new entrants of all shapes and sizes on the trail of a banking licence, responding to the call to deliver greater competition and diversity.
Is this a good time to launch a new bank? I can only respond to this through the lens of a team presently in-flight looking to deliver a new SME bank.
Yes, there is real uncertainty at the present time, but frankly uncertainty to some degree always exists, so you must look at the other ingredients. First, there remains a real desire from the government and the lead regulator (PRA) to deliver greater choice and competition through an authorisation framework which rightly sets the bar high, but reachable with patience and hard work. This has led to the PRA expecting between 20-30 more banks in the next two to three years. Second, if you consider the new SME banking entrants over the past decade, they have demonstrated ability to grow their lending and savings books to deliver early profitability and to attract investment. Third, the current account players have now seen the positive impact of the account switching service and the assurance provided by the Financial Services Compensation Scheme.
The SME population – the engine room of the UK economy – also continues to grow year-on-year helping drive economic growth. Significantly, our own market research of nearly 450 SMEs demonstrated the propensity of business entrepreneurs to forsake the monoliths and use new brands; 25% said their main bank was now ‘outside the big four’, 40% had already placed deposits with non-big four names and 30% similarly had taken a loan. This confidence will only strengthen as awareness grows.
The larger banks have enjoyed a strong run for too long and they have forgotten the importance that a time-poor business owner attaches to continuity of their bank contact. The Recognise 2018 survey confirmed this with 70% of SME respondents agreeing that ‘it was important to have a personal relationship with someone at their bank’ with two-thirds saying it was ‘difficult to meet a decision maker’. Relationship banking is, therefore, alive and well and if you build in speed of decision making, fast funds provision, access to decision makers and flexibility of loan structuring, then it is not difficult to see why the super-tankers of the banking world are finding it difficult to respond, allowing the challengers and new entrants to capitalise on customer frustration and disenchantment. Their position is also not helped by technology which is complex and creaking, while the new entrants can demonstrate agility, rapid deployment and ingenuity at a fraction of the cost it would have been a decade ago. For Recognise, state-of-the-art technology will support the human touch, not replace it.
The ‘challenger bank’ tag is unhelpful. The business banking market has been dominated by the same few banking names for generations and it will take time for any of the new names to challenge their market shares. Indeed, for many, size may not be the ambition, it is about better products and better service, more financing options and a fresh face with new ideas. The market is large and growing and times are changing.
But make no mistake, the licence process is an arduous journey, the first 12 to 18 months resembling an ‘MBA on steroids’ where cash burn is an ever-present focus and the most experienced teams continue to develop their knowledge. We are fortunate to operate in a benign economic period, but there will come a time when the tide turns and the new banks face a critical test. A test of their risk frameworks, their capital and liquidity resilience and the depth of management experience in navigating troubled waters. Conversely, the launch timing of some banks may provide genuine opportunity if there is a downturn as they will come to the market without legacy book issues. A Brexit hedge perhaps?
What we need to succeed is a consistency of political and regulatory will and an understanding that – for smaller financial institutions – regulation needs to be proportionate. Yes, there is uncertainty, but the truth is you have to live and deal with it, all the time focusing on hitting those starting blocks clutching a hard-won banking licence.
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