Myth 1: ‘Digital-only neobanks provide everything an SME needs.'
In the first of a 3-part myth busting series, we’re dispelling the common myths associated with digital-only neo banks and why, perhaps, the grass isn’t always greener on their side of the fence for SMEs.
Despite long being touted as “the future of banking”, research suggests that small businesses will often use digital-only neo banks and fintech solutions in conjunction with their traditional bank relationship, rather than to replace them. This narrative often gets overlooked whenever discussing digital-only neo banks.
What’s the real story?
The introduction of the Banking Competition Remedies (BCR) in 2018 aimed to increase banking competition in the SME in market, to ultimately help neo banks disrupt the historical successes of more traditional incumbents. Interestingly, since then, both Monzo and Starling claim to have gained over 8% of market share via the BCR scheme. What isn’t clear from these figures however is whether or not these are primary or secondary accounts.
The likelihood is that these numbers cited from Monzo and Starling related to secondary account holders, rather than primary. So, this begs the question: why has the uptake been lower than initially anticipated? Here are 3 reasons why:
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Lack of physical branches:
Even though we live in a digital world, there are SMEs who place a lot of value in having face-to-face interactions that traditional banks and financial institutions offer them. Without this physical dimension, it’s easy to see why SMEs, who want and need this from their financial institution, stick with their incumbent banks as their primary banking relationship, and digital-only neo banks as their secondary.
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Trust and credibility:
Traditional banks have a long and successful history of serving businesses of any size. This gives them the edge from a trust and credibility standpoint. SMEs may be hesitant to switch to a digital-only neo bank considering these institutions and organisations are so new to the scene by comparison, and so their proven track record is less-established.
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Limited tailored solutions:
SMEs need to have access to a wider range of financial solutions that will support their journey towards growth. These services include business loans, credit lines and accounting tools tailored to SMEs and their needs. SMEs need solutions that support their workflows and help them manage their cashflow/financial admin efficiently.
Whilst this is something that incumbent banks themselves have struggled with providing, the sands are shifting and, with the trust that individuals place on traditional banks factored in, it’s plain to see who SMEs will partner with should a wide range of supportive product offerings be available to them.
Sneak Peek of Myth 2:
Up next, we will be shedding light on the importance of regulation in banking for both the financial institutions and small businesses, particularly in the wake of a financial crisis. Is innovation and speed to market more important than the safety of SMEs? Find out in the next part of our ‘Myth Busting’ series.
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