As Britain looks to a new future following the decision to leave the EU, the country’s businesses need to keep focused on how they can continue to grow and invest in their firms. In particular, the confidence of the UK’s smaller companies, representing more than 99% of all private sector businesses[1], is crucial in ensuring the economy remains strong for the longer-term.

Labelled the ‘backbone’ of the UK economy, these 5.4millon[2]small and medium-sized enterprises (SMEs) rely heavily on access to finance and capital to fund growth.

Here, Mark Sismey-Durrant, Chief Executive Officer at Hampshire Trust Bank, looks at how the banking world is changing and adapting to the needs of smaller businesses.

For too long, the UK market has been dominated by larger lenders who between them control the majority of personal and business banking. The consequence has often had a negative effect on SMEs. Too often, smaller enterprises do not meet the strict lending criteria set out by some of these larger banks, and this has increasingly driven demand for more customisable solutions.In turn this has paved the way for the emergence of alternative finance providers and the wave of specialist banks. These new finance options bring with them a diversification of products to service those businesses thathave largely been neglected by bigger UK banking institutions.

However, the wave of challenger banks is growing and we are now seeing businesses of all sizes more comfortable with moving away from high street names when it comes to lending or taking out a business savings account. Within this challenger bank space, we see different business models, including those that are specialising in a particular sector or are focused on a particular audience group. These specialists can offer relevant expertise to help businesses with requirements that couldn’t necessarily be satisfied by a more generalist bank.

Being a specialist

Our own customers routinely tell us that the ability of specialist banks, such as Hampshire Trust Bank, to offer specific lending products and a more personalised service is what stands us apart when it comes to choosing a finance provider. We believe that specialistbanks have firmly solidified their place in the future of finance by fostering competition and improving choice for customers. Also, our view is that SMEs value long-term relationships with lenders they can rely on to support them through the cycle.

Inrelation to service, weseethe decision isn’t as simple as ‘branch or mobile’ but that a business owner is an individual, with distinct working patterns and preferences and what they want is something tailored to their personal needs. In other words, not being treated like an average customer with an ‘off the shelf solution’.

This confirms the need for a different shape of bank – one built on investing in traditional banking relationships, hiring individuals with experience put inthe time in to understand the challenges and opportunities that a particular organisation faces nowand in the future.

Oncoming headwinds

Despite the growth in the challenger and specialist bank sector, we do still face an awareness challenge among smaller firms. Some 60% of SMEs seeking bank finance still only approach only one provider, whilearound 90% of SMEs go to their main business current account bank for overdrafts, general purpose business loans and credits cards[3].

At the same time, smaller banks face a number of challenges. The bank levy is impacting the sector, making it harder to grow capital to support lending, which explains why challengers and specialist banks alike have lobbied so fiercely against it.

Furthermore, capital requirements are higher for challenger and specialist banks than for larger banks as they operate on two different capital models. This means that challenger and specialist banks, such as Hampshire Trust Bank, must hold more capital against their loan book than the bigger players do, which makes it harder for challengers to compete in certain areas of lending – reducing choice for the consumer or business customer.

We need to continue to cultivate competition if companies are to survive, thrive and grow over the long-term.

Looking to the future

The recent findings of the Competition and Markets Authority’s (CMA) report into the UK banking sector goes only a small way towards addressing competition. However, we also need to shine the spotlight onhow the banking community can continue to respond to the changing requirements of its customer base, by appealing to them with more suitable propositions and diversifying their product portfolios accordingly.

Challenger and specialist banks are having a far-reaching impact and this is playing a critical role in enabling and SMEs to realise their ambitions. It will continue to be the bedrock of UK growth, and specialist banks will be key to making the UK a successful place to do business.

[1]http://www.fsb.org.uk/media-centre/small-business-statistics

[2] As above

[3]http://british-business-bank.co.uk/wp-content/uploads/2016/02/British-Business-Bank-Small-Business-Finance-Markets-Report-2015-16.pdf