Small and Medium Enterprises (SMEs) are vital to the UK economy, accounting for 99.9% of businesses, collectively generating over £1.8 trillion in turnover and employing more than 60% of people in the private sector [1]. Over ten years on from the financial crisis where financial service providers had to redefine themselves – cutting costs, reducing risk and reining-in their lending appetite, it is now clear that these businesses have been underserved. Indeed, the Competition and Markets Authority concluded that competition for SME lending is not working well for customers [2].

Market Analysis

The big five banking groups have over 80% of the market but catalysts for change are presenting opportunities for other players to gain an advantage [3]. FinTechs have successfully harnessed these drivers for change to fuel fast growth whilst the big players continue to improve their offerings and provide security through their enormous balance sheets – it appears that the middle ground providers are in danger of missing out.

The SME Banking Competitor Landscape

The most important features to SMEs are customer service, account charges and interest rates [3]. Market leading providers are meeting this demand by offering a highly functional digital service, financial incentives and additional proposition benefits such as free office space (Revolut) and retail partnerships (Santander). The firms with the greatest drive towards satisfying these demands are often found either in the big five banking groups or within the FinTechs, with a few exceptions in the middle tier banks.

Drivers for Change

Key drivers for change that we have observed in the market include:

  • The Alternative Remedies Fund – a government mandated pool of funds to enhance SME banking offerings and competition.
  • Open Banking – the ability to access a customer’s financial information with their consent, allowing services to be tailored to SME financial needs.
  • Data Analytics – the ability to collate and analyse vast amounts of data, enabling a better understanding of customer behaviour.
  • FinTech – the rise of successful digital-only banking propositions.
  • Making Tax Digital – requirement for VAT returns to be submitted online (1 April 2019).

We will explore the impact of the rise of Fintechs, Open Banking and the Alternative Remedies Fund in more detail below.

Alternative Remedies Fund

The £45 billion government bailout of RBS came with several conditions, one of which (eventually) was a £775 million fund that aimed to improve competition in the UK SME banking market. Incumbent and FinTech firms below a certain size could apply for grants of various sizes (split into four pools) from the fund. Successful applicants of three out of the four pools have been announced, with the majority promising to match the amount of grant funding to deliver their capability enhancements that will, ultimately, benefit UK SME customers.

Grant Winners

Pool A: Metro (£120m), Starling (£100m) and ClearBank & Tide (£60m)

Pool B: Nationwide (£50m), Investec (£15m) and Co-operative (£15m)

Pool C: To be announced (14/08/2019)

Pool D: Codat, Fluidly, Form3, Funding Options and Swoop Finance (£5m each)

The implication for the market is that, in the main, the winners are challenger brands. The combination of having a clear strategic change roadmap and the funding to execute it could mean that they leave many of their competitors, particularly in the middle tier, behind. It is now more important than ever that these middle tier firms ensure they have a strategic change agenda to combat the threat to their business emanating from the Alternative Remedies Fund.


Short-Term Success

FinTech firms have seen exponential success in recent years with customers enjoying the ability to complete their required banking functions predominantly through a digital channel. Starling signed up more than 10,000 business customers in just over five months and Tide surpassed 1% of the business current account market at the end of 2018. FinTechs are achieving this by harnessing a lack of confidence in the banking sector to grow their presence – indeed, just 13% of SMEs trust their bank to act in their best interests [4].

Attractive Proposition Features

The ability to setup and edit scheduled payments, categorise transactions, provide 24/7 in-app customer support, offer instant invoicing and zero account fees are a few examples of the attractive features for SMEs offered by FinTech providers such as Tide and Starling. Their propositions provide better flexibility and control, delivering obvious benefits to micro and small business owners.

Furthermore, the emphasis that these players place upon ensuring their digital interactions are slick should not be overlooked. Highly functional, reliable and simple to use digital journeys are becoming a hygiene factor for most SME customers. Indeed, digital platforms are used 90% of the time to pay suppliers and 83% of the time to transfer money between accounts [3]. As most banking interactions are digital, it provides the greatest potential to delight and frustrate customers, so it’s crucial to get this journey right.

The middle tier players in this market will become increasingly squeezed by FinTech providers who have already stolen the march on them by showing their customers that they are ‘on their side’ through both their proposition benefits and digital journey design.

Open Banking

Open Banking was rolled out in January 2018 and allows customers to share their transactional data with third parties. Open Banking has significant potential to improve the SME banking experience in the following ways:

  • Tailored Business Insights – utilising the vast amount of information that service providers possess (e.g. business spending habits by industry or region), relevant insights on spending patterns and sales can be produced and compared.
  • Enhanced Finance Offerings – the ability to combine categorised transaction data with new third-party data sets increases the bank’s knowledge of the financial standing of their SME customers. This offers the potential to develop new, innovative and fair products which are easily taken up by SMEs without a heavy admin burden.

The Market Impact

Iwoca, a new business lender using third-party data integrations to support underwriting, achieved a 12% share of the new small business overdraft market, beating HSBC (11%) and Santander (9%) in the last quarter of 2018 [5]. Iwoca realised that the small business lending market lacked both demand and supply of credit (net lending has decreased in every quarter since 2015 [3]) despite business needs to fund growth (over 65% of SMEs will accept a slower growth rate rather than borrowing to grow faster [2]). They developed a clear and focused strategy that leveraged the increased access to data in order to improve the lending interactions and experience.

Opening account data through APIs is enough to comply with Open Banking and Payment Services Directive 2 regulation but it will not be sufficient to develop a market leading offering. Those banks who do not have an Open Banking strategy which focuses on positive SME customer outcomes could be left behind by those who understand how to leverage data in product and user experience design.


The SME market is becoming increasingly competitive which should help lower prices and improve the service offerings that SMEs receive. The large incumbent players are well prepared – investing heavily to improve customer satisfaction and readying themselves for the well-equipped challengers who are exploiting the market drivers to achieve rapid market growth.

By default, the short-term success from the bottom and strength from the top will result in pressure being forced on the middle ground. It will fall most heavily on those without a clear SME banking strategy and the means to execute it. The time has come for these middle ground players to reflect on the market drivers and develop a clear and compelling strategy to remain relevant to their existing and prospective SME customers.

Grant Thornton have significant experience of supporting the SME banking market. If you would like to discuss this article or the themes contained within in more detail, please do get in touch with or


[1] Fair Business Banking (Cross Parliamentary Group)

[2] SME Finance (House of Commons Treasury Committee)

[3] Mintel 2018

[4] Banking Services to SMEs – FCA

[5] UK Finance