U.K. alternative financial service (FinServ) players promising a small business (SMB) banking revolution — and a challenge to the status quo established by high-street banks — may have spoken too soon. The U.K. market has seen a surge in challenger banks and FinTech firms vowing to give small businesses a better experience, as frustration and dissatisfaction with large traditional financial institutions (FIs) loom. Add regulatory initiatives pushing for bank switching and industry competition to the mix, and the market is ripe for disruption, certainly.
Yet, the vast majority of small businesses stick with a traditional high-street bank, suggesting the deluge of challengers that recently stepped into the market have done little to nudge the needle on small business FinServ, even as challengers continue to warn the big banks that they may lose their SMB customers. Why?
One recent report suggested that trust remains the number-one priority for small businesses when choosing a banking provider, even above lower fees and increased access to digital and mobile products. Most SMBs do rely on online and mobile banking platforms though, and more than one-third regularly experience technical difficulties from their providers. However, traditional FIs still hold the lead.
Data from IT solutions provider Unisys found that one-sixth of U.K. small businesses want to switch financial service providers, and nearly half said they're considering a challenger bank more than an industry incumbent. With trust as such a key factor to win business, though, challenger banks and FinTech firms undoubtedly have a disadvantage to the centuries-old banks of high street.
Eduard Panteleev, co-founder and CEO of ANNA , one of the newest alternative FinServ providers in the U.K. targeting small businesses, said challengers' lack of traction with SMBs largely comes down to small business owners' lack of time and awareness.
"Challenger banks are a relatively recent introduction, and many of them launched personal products before business accounts," he told PYMNTS. "Many [SMB] owners in the U.K. aren't fully aware of the benefits available to them."
ANNA (which stands for Absolutely No Nonsense Admin) is positioning itself in the increasingly crowded challenger market by targeting small businesses and entrepreneurs in the creative industries, like advertising, entertainment, crafts and even distilleries. The company is not a bank, but works with banks to offer services to small businesses, including invoice management, payments, payroll and domestic bank transfers. Moving forward, the company plans to introduce the ability for users to send invoices and chase payments.
Panteleev said the decision to focus on payments and invoicing is the result of the ANNA team's own experience struggling with these processes as small business owners. Entrepreneurs' lack of financial management skills — particularly in the creative industries — has small businesses struggling to adequately manage money, he explained, while they also lack the capital to invest in dedicated finance teams.
"Tasks like these, [invoicing and payroll], are then pushed to the end of the week or after work," he explained. "This, in turn, can affect cash flow."
He added that cash flow crunches are the most common reasons new companies fail in the U.K. Automating some of the basics of running a business, like invoicing, can have a significant impact on the viability of a firm.
Some industry experts say that SMB-targeting FinTech firms offering an automated suite of services are not only threatening large, traditional FIs with lost clients, but pressuring those banks to innovate and step up their offerings. Even so, big banks reign supreme.
"The reality is that the majority of small businesses are still served by traditional banks and service providers," Panteleev acknowledged. According to the Unisys research, even challengers' offerings of digital tools and a better technological experience cannot compete with the long-standing trust and brand recognition provided by industry giants.
The importance of trust suggests that, more so than product offerings, small businesses need a more emotional or human-level reason to ditch their providers. According to Panteleev, in addition to enhanced digital tools, some challenger banks are able to offer something that traditional FIs don't.
"The status quo of traditional banks offers huge scale, but lacks a personal touch," he said, emphasizing the importance for challengers to mix technology with that human element of customer service to truly convince a small business to switch providers. In ANNA 's case, that means mixing artificial intelligence (AI) with a touch of human empathy.
Being able to quickly address common problems that small businesses have is where AI comes in, Panteleev said. However, tackling more complex issues, that's "where the human side comes in," he continued, adding that these problems "are best approached with empathy and experience."
In the U.K., FinServ providers have to take into account another key factor of the customer base. It's a challenge that could hold small business owners back from being able to trust the new technologies, like AI, that some of the market entrants deploy — yet, it's also a challenge that can benefit from a "human element" to problem solving, he said.
"British people are naturally skeptical and critical," he said. "Especially those with their own business to run."