Is the traditional business banking model dead? Are the main lending banks set for a headlong retreat from the SME banking market?
It is claimed that 74% of CEOs do not believe their bank understands their business or even cares about them.
A recent gathering at the House of St Barnabas in London of senior bankers from traditional as well as challenger banks, entrepreneurs, academics, journalists and researchers examined just these questions. What emerged was something of a surprise. Whilst traditional business banks are under extreme disruptive threat, they have two key assets that challengers and the peer-to-peer brigade don’t have. Or at least don’t yet have.
As one expert said:
“The future for European banking is binary; it’s either fantastic or disastrous. Banks will either learn quickly to use their assets or lose out.”
Before exploring those assets it is worth considering the perfect storm of challenges the big banks face between their deteriorating relationship with customers and the entry of creative and customer-centric challengers.
According to these experts in London, banks’ relationships with their customers is far from great. One summed it up “most peoples’ views of their bank is “meh” – expectations are so low. And “meh” is a dangerous place to be.”
Banks are seen to be slow, unimaginative and beset by legacy. Most seriously, they seem to have lost interest in – and the skills to – deliver their traditional role to SME customers.
The cause was clear. “The banks have completely de-skilled their people. Their front-line team has no clue about my business – or any business,” commented one business owner. “The advice that used to be available through relationship managers has been retrenched and lost through greater centralisation.”
Unwilling to Lend
Worse still, the big banks seem unwilling to lend. One challenger bank commented:
“The failing of the UK banking industry is the source of our success. The big banks are shooting themselves in the foot. If you are continually telling the customer they can’t borrow, they find money elsewhere”.
An entrepreneur said, “If banks can’t understand how to lend in the modern world with flexibility, then they really do have an existential threat”.
At the same time as the traditional banks seem intent on downgrading their service, a host of new options are emerging. “Monzo and Tide will change what people expect from their bank,” commented another observer. “They are building a bank based on customer need.”
So, is it game over for traditional business banking? Well, surprisingly the answer seems to be “not necessarily”.
“The Banks right now have the opportunity to turn around the situation. At the moment they still have the hearts and minds of most customers. If they continue to abuse this, the future is a wholesale move to someone who will offer substantially different benefits.”
What then is the solution for the big banks? That comes back to the two assets mentioned above.
The first of those assets is relationships. Big banks still have a vast resource of local relationships. Their mistake is in de-skilling their front-line business. As one entrepreneur told the audience:
“the power of the relationship manager is extraordinary when they are given the knowledge and the opportunity. The value of their connectivity is exceptional. They can spot opportunities for me and for the bank”.
This group of customers, practitioners and experts saw re-skilling relationship management as a key defensive strategy for banks. What is needed are genuine business partners with the skills to listen and challenge. But they also felt banks should offer a choice; a low friction technical solution for those who want it, and a relationship-focused service for those who would value it.
“The insight the banks seem uniquely unable to grasp is that you focus your people on what people are great at and your technology on everything else. People are great at relationships. Banks turn their people into order-takers”.
The second asset of the big banks was, ironically, data. Ironically, because as one expert observed, “what the challenger banks and the peer-to-peer platforms are doing well is using data. The big banks have much more of that data but don’t know how to use it”.
One senior banker acknowledged the problem, “We have a view into about 25% of all UK transactions. Apple or Google would do something sexy with that. We can’t seem to do this”.
Too Late for Big Lenders?
If the big banks move fast, it is not too late. As one commented, “The big banks, uniquely, have the opportunity to do both relationship and technology. Their biggest opportunity is to reboot personal relationships and work out how to streamline the vanilla stuff.”
“The banks have visibility of so much data they need to learn to use it. They have unique relationships at the local level; they need to learn how to stop abusing these and create more value. The future could be very bright. But if they don’t, alternative providers will become dominant. Ant Financial is five years old and already sees 90% of transactions in China. Their approach is wholly disruptive. They are already talking to technology companies in Europe.”
The prize of getting this right is huge. One researcher told the audience “Our research suggests there is £8 billion of potential fee income from SMEs in the UK alone.”
Will traditional business banking survive the next 5 – 10 years? The omens are not good. History tells us that large, inflexible organisations always fail in an environment of disruptive technology. And it is by no means clear that the big banks are taking this on board. As one entrepreneur who has recently moved banks concluded:
“There is institutional arrogance in the banks. A sense of entitlement: ‘It can’t happen to us’. It can. And it will.”