Metro, Starling and ClearBank have been awarded a combined £280m from the RBS bail out fund, beating off competition from better-known brands TSB, Co-operative Bank and CYBG.
The awards from the Capability and Innovation Fund Pool A is designed to promote competition in the market for banking services to SMEs in the United Kingdom. It forms part of a £750 million package of grants demanded under EU rules for the state-aided bail out of RBS during the 2008 financial crisis.
Metro Bank was granted the largest slice of the pie at £120 million, followed by Starling at £100 million. ClearBank, which is collaborating with SME banking startup Tide, walked away with £60 million.
Metro Bank, which recently saw its share price fall by 40% over accounting irregularities in the classification of loans, is committed to matching the award with £240m of its own investment and opening another 30 branches in the north of the UK. Starling, meanwhile, plans to recruit another 400 staff for its push into business banking and will likewise match the funding received from the Remedies Board.
Of the bigger banks, Santander pulled out the bidding at the last moment because of worries about the economy, Brexit and regulatory changes, while the recent IT meltdown at TSB may have punctured its credentials.
Godfrey Cromwell of the body set up to oversee the fund, the Banking Competition Remedies Board, says: “These awards seek to increase competition in the business banking market and to improve the financial products and services available to SMEs. Pool A is the first group of grants from the Capability and Innovation Fund. Further grants (Pools B, C and D) will be awarded later this year.”
The largest award in these later rounds will amount to £50 million.
Whether the process will succeed in injecting competition to the business banking market is another matter. Recent research conducted by Accenture among 1000 SMEs found that three-quarters said they would be unlikely to switch banks in the coming twelve months and 41% express a preference for the service offerings of trusted and established financial brands
Stuart Chalmers, head of UK commercial banking, Accenture commented: “The high level of SMEs unwilling to switch places the onus on competitors to develop a distinct offering and effectively communicate the long-term benefits. With strong customer loyalty and unconvincing switching incentives, the RBS Remedies Package’s goal to disrupt the market looks currently unachievable.”
However, the research also demonstrates that there’s appetite for digital services, with a fifth (21 percent) of SMEs stating that they would prefer to interact with their bank through its website or app. In addition, easy access to these tools was highlighted as an important reason why a business would be willing to switch providers, just behind lower fees and improved service.
Chalmers concludes: “Growing demand for digital services may present an opportunity for challengers to begin to assert themselves, but crucially, customers want these services from their existing trusted providers. Banks need to keep up with the pace of change and those that invest in the day-to-day experience of customers, capitalising on demand for digital and traditional services, stand the best chance of solidifying customer loyalty and retaining their market share.”