The forthcoming launch of a digital-only SME bank by Santander will help improve competition in a sector that has been characterised by customer inertia, high levels of concentration, and a lack of transparency.
Santander is set to launch a separate, digital-only SME bank in the UK later in 2018. It is one of four separate digital “speedboat” units currently in development, which will offer a full range of business banking services including lending, payroll, and pensions.
The launch has been timed to coincide with the distribution of funds from the £833m ($1.11bn) RBS has been compelled to hand over to SME providers in return for state aid received during the financial crisis.
Incidentally, Santander is likely to receive a larger-than-expected share, given that TSB will almost certainly be penalized following its botched IT transfer.
The bank has been quoted as describing the new entity as an “open digital financial services platform for SMEs,” which suggests that it may leverage the possibilities afforded by the new open banking regulations that came into effect in January 2018. Santander also appears to be following a wider trend of traditional banks establishing separate digital offshoots to capture market share. RBS, for example, is rumored to be launching a standalone digital bank with differentiated branding in Q3 2018.
The SME market should prove fertile ground for Santander. The Competition and Markets Authority’s 2016 retail banking market investigation found that the SME banking market is characterised by low levels of competition, with just four banks controlling more than 80% of business bank accounts in 2015.
It also stated there are limited levels of new entry and innovation in the market, with potential entrants put off by having to contend with high levels of customer inertia.
However, the dawn of open banking should help invigorate the market and reduce barriers to entry for the likes of Santander. The UK’s SME banking market is ripe for overhaul. Should Santander’s efforts prove successful, other competitors will surely follow.