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The evolution of small business banking

Small-business banking is undergoing a rapid evolution. While traditional banks struggle to meet the needs of small-business customers and close high-street branches, challenger and virtual banks offer an attractive alternative, and are growing as a result.

As discussed in previous blog posts, many traditional small-business bank accounts come with hefty fees and lack flexibility for growing businesses. In addition, international payments can be costly and customer services are more cumbersome than those offered by newer rivals, often requiring a visit to a branch.

Emerging challenger and virtual banks provide services that are more flexible, cost effective and easy to use. Many also support a cashless approach to business, which can bring a host of advantages, not least of which is removing the need to handle and keep physical cash secure.

There is evidence to suggest that established banks are now making efforts to catch up with virtual banks and other fintech players, with a range of digital products, services and businesses. However, challenger and virtual banks, as well as other fintech players, continue to bring change to the world of business banking.

Showing the momentum that challenger banks have in the UK, Metro Bank, Starling Bank and ClearBank were recently granted a total of £280 million from a government fund aimed at making small-business lending more competitive. The Banking Competition Remedies (BCR) scheme was set up to help start-ups and online-only banks win business from established rivals. The funds can be spent only on improving financial products and services aimed at SMEs.

Virtual banks like ePayments are continually bringing new services to customers. Digital bank Monzo, for example, recently launched its first business accounts. The bank will initially accept 100 applicants into beta testing and hopes to launch accounts fully for small businesses by the end of the year.

Looking beyond banks, digital payment company Square recently launched a free debit card for small businesses intended to help them better manage their cash flows. The MasterCard debit card will allow companies to spend funds from sales they have processed via Square’s payments systems as soon as they have made the sale.

While the model of bank branches is still a factor for traditional banks, the reality is that many high-street banks have shut their doors in recent years in a bid to cut costs. According to a parliamentary review last year, the total number of UK bank branches has fallen from 11,365 in 2007 to 7,207, while consumer advice group Which? suggested a total of 1,076 high-street banks and building societies have closed or are planning to close in 2018 and 2019. The Banking Standards Board recently said these branch closures are damaging small businesses and urged banks to collaborate.

Traditional banks have attempted to provide improved customer services through other channels, but there are now moves to fill the gap left by branch closures with other bricks-and-mortar facilities.

Natwest, Lloyds Bank and Barclays have unveiled plans for joint business hubs with a pilot at six locations across the UK. The idea is that business customers of all three banks will be able to use the hubs to pay in large volumes of coins, notes and cheques and complete cash exchange transactions.

Clydesdale and Yorkshire Banking Group (CYBG) is taking another approach with its proposed SME hub and retail store in the centre of Manchester. Part of CYBG’s digital banking brand ‘B’, the B Works facility will comprise a business banking centre, co-working space, private meeting rooms and a programme of business events.

Reflecting a change in how traditional banks work with small businesses, TSB committed to help UK small-business borrowers facing financial difficulty. Through its SME Lending Pledge, the bank said it will offer greater protection for small-business owners, in response to the needs of business borrowers and industry-wide calls for sufficient safety measures for struggling businesses.

The bank has also committed to being more transparent with small businesses, giving struggling companies "reasonable time" to return their businesses to health, and to keep loan margins unchanged if they enter financial difficulty.

Barclays, meanwhile, hosted more than 100 clinics for small-business customers in March in preparation for Brexit, with 1,500 Barclays staff providing advice on issues such as managing cash flow, exporting goods and supply chain management.

The number of banking options open to small businesses has never been greater. Whether they take the plunge with newer players or stick with the traditional banks, small businesses are sure to benefit from services that better reflect their needs in today’s economic reality.

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The evolution of small business banking
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