The past 12 months have seen many challenger banks step into the business banking world. There have been great promises made, but businesses have a large range of needs.
Can the likes of Monzo and Starling truly succeed in this space?
In this blog, we look at where challenger banks can improve, and where high street banks still have the edge. The blog will also refer to our May 2019 blog post on small businesses – and emphasises why branches and ATMs are essential for many SMEs. We’ll also discuss how high street banks may adopt a lean branch models to help close the gap.
Challenger banks will need to be able to provide a seamless user experience to convince small business owners to make the move from legacy banks and build customer trust and loyalty right from the start.
In order to succeed in the already busy banking sector, they will need to have a differentiator.
At the moment, we are seeing that Starling is targeting female customers by championing women in finance and organising women in business networking events. Whereas, Monzo’s Business Pro account focuses on freelancers by calculating their tax based on annual income.
High street banks aren’t going anywhere
This is where high street banks still maintain an advantage – many have been around for decades and have managed to retain customers over the years, who have recommended their services to family and friends.
While challenger banks have a competitive edge due to the fact that they’re digital natives, they know how to leverage their customers’ data to create bespoke journeys.
Therefore, it is essential that our high street banks invest in the modernisation of their IT infrastructures and adapt their branches so that they make the most out of their ATMs. Especially as a large majority of consumers prefer to pay with cash or depend on cash to make payments.
For instance, those from poorer economic backgrounds find it easier to stay in budget using cash, tradespeople who are often paid in cash, and those without a business bank account.
Watch out for fees
Another reason why businesses may decide to use high street banks is because the nature of debit or credit card payments is quite costly.
According to Handepay and Small Business, to accept card payments, small businesses must factor in processing fees including basic rates for individual transaction processing, premium rates for processing transactions above the basic rate, plus fees for payment authorisation too.
The average business will be expected to pay £1 per day to own a card terminal; the cost quickly adds up over time and eats into profit margins, so cash can be far more economical. So high street banks need to be able to provide access to cash via their branch ATMs.
In addition, bank branches are a vital resource to small businesses given that they offer access to a wide range of financial services, from cash depositing and video banking to loans support and even financial advice.
Unfortunately, many small businesses are yet to benefit from this support during normal banking hours, which could affect their sales. Those living in rural or remote locations may also not have a branch nearby and have limited access to online banking services, which results in businesses closing for longer periods.
So, it is fundamental that banks are able to provide access to financial services to businesses in rural communities. By leveraging new technologies, such as video banking, visitors will be able to tap into remote tellers 24/7 via a video link.
Portuguese retail bank, Millennium BCP, is already enjoying the benefits from using this technology, as it allows the bank to continue to serve customers outside business hours in an efficient and cost-effective way.
This is particularly important during COVID-19 as the need for SMEs to have access to financial services, whenever they need to safely and securely, is more important than ever.
The benefits of lean branches
In future, more and more legacy banks may decide to run white label ATMs and branches to remain competitive.
Whilst the cost of running ATMs can be high, white label ATMs (machines owned and operated by non-banking organisations) could assist larger businesses in boosting profitability and driving additional revenue streams in rural locations, as they receive an interchange fee from the bank each time the ATM is used.
Plus, by creating a white label branch, whereby a bank shares its branch with another bank or organisation, it enables them to use the space or technology for a concession – it could be for currency exchange, a café, or even a community hub.
We are witnessing an increase in lean bank branches as high street banks and challenger banks attempt to close the gap.
In the near future, it will be common practice for banks to provide a physical location offering banking services that have been optimised to reduce operating costs, boost efficiency, and maintain high levels of customer satisfaction.