A paper published by Revolut, entitled “2020 Vision: Taking a closer look at antiquated business practices”, states that 42% of SMEs are looking to change banks in the next 12 months, owing to changing expectations and demands of businesses.
The research was based on surveying 602 business owners, managers and financial directors from companies in the UK, France and Poland with 250 employees or fewer.
Any widespread desire of SMEs to seek new banking providers will be good news for recent entrants in business banking.
Monzo announced its plans to start providing business accounts earlier this month, while Starling Bank has recently expanded its business offering that it first launched in 2018. Revolut itself has been offering multi-currency business accounts since 2017.
Revolut’s research however finds that UK businesses are rather less likely to bank with multiple providers than their counterparts elsewhere. 37% of UK SMEs have two or more banking relationships, compared to 65% in Poland and 49% in France.
This suggests that digital challengers may find it difficult to replicate their success in personal banking of growing market share by becoming a customers’ secondary or tertiary account.
According to the research, 63% of business owners have not switched their provider in five or more years, with some 23% not having changed since 2008. Additionally, 79% still have their primary relationship with a major high-street bank.
An existing personal banking relationship is the most common reason cited for how businesses choose their provider, with 42% of UK respondents saying so.
The number of accounts held with digital banking startups stands just shy of 20 million in the UK as of late 2019, according to Accenture, which suggests that there is a healthy client base for them to target to grow their business banking footprint.
Branch and cash use
However, Revolut’s white paper does highlight some of the challenges that will be encountered along the way.
A not insubstantial 29% of respondents still need to visit their branch once a month. This appears aligned with 27% of UK SME owners who chose their current provider based on the proximity of a physical branch to their main place of doing business. It appears therefore that there is still life in bricks and mortar business banking in the UK yet.
Where digital-only banks may see cause for optimism is in the direction of travel for cash usage. The percentage of payments taken by SMEs in cash currently stands at 23%, down from 60% a decade ago. UK Finance estimates this downward trend to culminate in cash being involved in only 9% of transactions by 2027.
Cash could indeed be ushered towards the exit even sooner than predicted given current events. The Coronavirus pandemic has seen contactless limits increased to £45 to deter cash payments and help minimise some of the risks associated with the exchange and handling of paper money.
Any acceleration in cash usage’s decline would likely have an effect on the demand for physical branches.
It is unlikely though that high-street banks would sit by and watch as any downward trend in branch banking continues. If RBS or Barclays witness lessening demand for the services offered by branches, it is natural they will reallocate resources to digital areas of the business, ensuring they are meeting their clients’ expectations for a technology-centric offering.
Nationwide has demonstrated this week the necessity to close branches in reaction to circumstances, shutting 50 of its 650 outlets in response to COVID-19.
Nonetheless, digital-only banks should still be able to find a competitive advantage in not having the overheads that come up with manning and maintaining bricks-and-mortar branches, especially if they can pass these savings back on to the clients through lower charges and fees.
B2C to B2B
More broadly, however, it seems that the challenges facing Revolut et al in business banking largely resemble those experienced in retail.
SMEs list being wedded to a local high-street branch, concerns over difficulty in switching banks, and a belief the lack of alternatives as the primary reasons for remaining with existing providers. These varying manifestations of customer inertia have all also been frequently cited behind switching rates in retail banking being historically being so low.
Digital challengers may then need to look to the same vehicles for stimulating change in the business banking market as they have in drawing retail customers.
One of these is in the onboarding process.
“Does your bank still require some processes to be undertaken in person?” Revolut asks in its white paper.
“Can you open an account, add a signatory, or apply for an overdraft without visiting the bank manager in person?”
Just as digital banks have removed many of the frictions of opening a new personal account, removing the more cumbersome, administrative tasks in business banking would surely prove a big draw for SME owners.
Similarly, digital banks will need to look at what innovations they can deliver thanks to Open Banking. If they can offer aggregation tools and dashboards to allow clients to see their accounts with different providers, they could allay some of the reservations that business owners may have about working with multiple providers.