Obtaining a small business loan might seem scary at first, but it's easier than you might think. If you've never done it before, or if you've never spoken to a specialist regarding the matter, you might have heard a few things that are not only false but downright toxic when it comes to growing your business.

Before we get into the myths, you have to understand a few critical things about small business loans: they can vary by type and lender, which means that not all loans are the same. Each type of loan can have advantages and drawbacks. According to the nature of your business you're running, your track record, and how much money you tend to make every month, different types of loans might suit you better than others.

So let's get into the myths and why they're simply myths:

Myth #1: Obtaining a small business loan is a long and frustrating process.

False! As long as the amount of money you want to obtain falls below the million-pound mark, or even better, below the 500k mark, you can typically get a loan in just a few days. As long as you're transparent about your business and about what you intend to do with the money, you shouldn't have any problems applying for credit either at the bank or at private lenders.

Even better, if the amount you need is very small and if you want to get rid of the debt in less than a month, you can try out payday loans. You can apply online on a direct lender's website, and you don't even need to fill out too many forms.

As long as the amount of money you want to obtain falls below the million-pound mark, or even better, below the 500k mark, you can typically get a loan in just a few days.

Myth #2: Your credit score must be impeccable.

While traditional banks care a lot about your credit score, alternative or private lenders don't take it into consideration that much. Instead of looking at your financial history, this type of lender analyses the financial reality for a certain business based on market trends, your area's economic status, and other similar factors.

In any case, don't limit yourself to just one offer. Instead, ask several lenders about their offers and try to negotiate what best suits your situation. You might stumble upon a far better offer than you were expecting.

Note that while your credit score doesn’t matter as much, you still need credit history. A credit history is different from your bank profile. It gives lenders proof that you can handle a loan. Having credit history also indirectly impacts your credit score.

A good strategy for increasing your credit score is to apply for a payday loan. While these loans offer only small amounts of money, it’s usually enough to cover urgent expenses such as taxes or health emergencies. And because we’re talking about small sums, you can pay them entirely within one month. And the best part: you can get them online from a direct lender. Bonus: they also increase your credit score by showing banks that are able to handle your finances.

Myth #3: If you ask for too much money, you'll be instantly rejected.

How much money you request doesn't necessarily impact your approval chances. In fact, lenders often prefer giving out big loans because they win back more money over time. Banks are especially more hesitant to give out small loans rather than big ones. It's generally a good idea to apply for just how much money you need while considering how much you can pay back monthly.

Afterwards, the lender is going to check if you have enough cash flow to make your payments on time. As long as you take these factors into consideration, you can grow your business so much that your profits might easily surpass the lender's interest rate.

Myth #4: Getting a loan for a start-up is nearly impossible.

Many aspiring entrepreneurs simply assume that you need to have been in business for at least a few years to build up a credit score before applying for a loan—nothing further from the truth. In reality, a lot of lenders offer start-up loans that are aimed specifically at businesses with little or no credit history.

Sure, your personal credit score will be taken into account. However, as long as you're in good standing and present yourself with a good business plan, you'll likely get approved. So do your homework and don't be afraid to ask for an expert’s help. You might be pleasantly surprised by the outcome.

Myth #5: The bank is the worst place to get a small business loan.

While alternative financing is usually great for obtaining small business loans, banks can often offer some advantages. For example, if you're in a fast-growing field such as IT, healthcare, or software consultancy, banks might not be that great. However, if you anticipate a steady growth over a couple of years, then traditional banks have great offerings.

They have several plans from which you can choose. Fixed interest rates and flexible interest rates might also play a big role in choosing what's best for you. Commissions, late fees, and early repayments also need to be considered. Yes, some banks often cut a small part of your interest rate if you pay a part of your debt in advance. That might just be what you were looking for your business.

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Myth #6: Online lenders are frauds with disgusting interest rates.

False. This one is simply false. If we were to go 20 years back in time, sure, such a statement might have made sense. However, the world has changed so much it's almost incredible. Think about all the things you do online every single day. Now think about how you used to do them in the past. It's not any different from loans nowadays.

More and more online lenders have appeared on the market in the last couple of years. Many of them offer single-digit interest rates. It's up to you to find the ones who offer plans that benefit you in the long run.

Closing Thoughts

We hope the information you have found here will help you make the right decision. To reiterate, what matters most is finding the right solution for you. To achieve this, never be afraid to consult with experts. And ask the lenders as many questions as possible before making a commitment.

So do your research and don't be afraid to try something that you haven't until now. The small loan you take out today might benefit you immensely in a couple of years. Or maybe even in a couple of months.

As the UK heads into another period of extreme uncertainty, many businesses will be turning to their contingency plans, and rightly so. However, in amongst all the noise from Government, there has never been a more important time to keep talking, especially for businesses and their banking institutions. This problem is not going to be short lived, so burying heads in the sand is no longer an option. Shakespeare Martineau banking partner Chris von Strandmann offers advice to businesses below.

With the latest wave of updates moving away from health to focus more on the economic impacts of COVID-19, contingency plans are bringing some relief to businesses in their time of need. For those who haven’t done so already, the single most important recommendation is to develop contingency plans and share them as early as possible with the business’ bank.

Rather than being too exact about the details – which are changing by the day - make sure the plan includes an impact analysis of a number of different scenarios. The most common areas for businesses to consider are impacts on the workforce and working environment, changing regulation, potential supply shortages, late payments and inflexible contracts, in turn, alternations to these could directly impact working capital, funding and loan arrangements, as well as other agreements with banking and financial institutions.

Working capital must be considered carefully. By stress testing some common scenarios, businesses will be able to understand the impacts on cash flow. For example, if additional stock is needed to protect against a shortage of supply or debtors delay their payments because their cash flow is under pressure; banks should be able to help alleviate the pressure on the business with temporary overdraft facilities. The Government is also bringing out multiple support packages to help them through the COVID-19 crisis.

At the core of most businesses are their people, and as the virus spreads and self-isolation is becoming a common occurrence, being able to operate on skeleton staff – or at least know what the minimum capacity is – will help leaders make crucial decisions or know when to speak to banks and lenders before it’s too late.

For those who haven’t done so already, the single most important recommendation is to develop contingency plans and share them as early as possible with the business’ bank.

With new employment regulations being added at the drop of a hat, businesses must make sure that they know what their obligations are. On March 13, the Government introduced a new regulation that stated that employees with symptoms of coronavirus, who self-isolate in accordance with published guidance, are now entitled to claim statutory sick pay from day one of their illness. Although it looks likely that the Government will refund these payments, the time lag before reimbursement could be significant. With the possibility of needing to recruit temporary workers, as well as extended sick pay obligations, cashflow could take a big hit and banks can provide a short-term capital injection while businesses recoup costs.

For many businesses, agile working is not a problem, but for some, an upfront investment of suitable IT equipment may be necessary to make this possible. Providing laptops, workstations and mobile phones to enable work to continue out of the office can be a costly exercise, but could make the difference between a business staying open, or not. Seeking funding options from the bank can help to keep your business going, without putting too much pressure on cash flow.

To ensure funding agreements with banking institutions don’t penalise businesses further in this time of crisis, it is worth having conversations at the earliest convenience to negotiate some flexibility if there are covenants in place. For example, some finance agreements will sometimes contain a ‘clean down’ condition requiring a business to keep its account in credit for so many days each month, and if cash flow tightens, it may find itself in a situation where achieving this may be difficult. Other covenants may be around leverage and the business’ debt servicing ability. If profits are expected to be impacted, this could trigger a breach of this type of borrowing condition.

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It pays to be prepared and, of course, banks will want to be seen to be helpful. Last week, UK banks came out with a list of emergency measures, including suspending loan repayments and fee free emergency loans to help businesses overcome some of the current challenges they’re facing.  Various lenders have already announced the availability of fee free loans for businesses that are hit by the coronavirus outbreak and it’s likely others will follow.

Banks hate surprises and they won’t know what they aren’t told. Businesses must make contact with their banks at the earliest opportunity and shouldn’t be afraid to tell them exactly how it is – if there is a place for brutal honesty, now is the time. And, it is likely that many other will be having similar conversations too. Businesses are not alone and speaking to local authorities, banks and other business leaders should not be underestimated.

This is the message from Nigel Green, the chief executive and founder of deVere Group, as G-7 finance ministers and central bank officials are due to hold a teleconference to discuss the issue on Tuesday.

US Treasury Secretary Steven Mnuchin and Federal Reserve Chair Jerome Powell will lead a conference call taking place before Wall Street opens. Bank of Japan Governor Haruhiko Kuroda and European Central Bank President Christine Lagarde are also on the call, amongst others.

Mr Green notes: “For many, the joint statement will not go far enough, and there will be doubts about the effectiveness. This disappointment will dampen the market reaction somewhat.

“However, in general, the markets are looking for a reason to return to being bullish – which has been their default position for an unusually long time.
 
“This teleconference between G-7 finance ministers and central bankers will likely provide some of the reassurance they seek.”

He continues: “Many investors will be seeking to buy ahead of any potential measures aimed at cushioning the coronavirus blow kicking in, in order to take advantage of the current lower entry points and, therefore, the opportunities, while reducing risk at the same time.”

Last week, the deVere CEO said: “Until such time as governments pump liquidity into the markets, markets will be jittery triggering sell-offs.”

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Mr Green affirms: “It was billed as ‘the worst global market sell-off since the 2008 crash’ but it then became an important buying-opportunity for many investors.

“Now, with a more coordinated international response in the pipeline, many investors can be expected to jump off the sidelines again.”
 
Previously, he noted: “In the current volatile environment, investors - including myself - will be revising their portfolios and drip-feeding new money into the market.”

The deVere CEO concludes: “Central banks and finance ministers of the G7 discussing an action plan to take on the far-reaching impact of coronavirus will buoy investors.  

“Many will be seeking to increase their exposure to the markets ahead of the implementation of any measures that are rolled out as a result of this conversation.”

HSBC announced today that it plans to cut 35,000 jobs over the next three years following an overall YoY 33% profit drop and subsequent restructuring plans. It also said the impact of coronavirus could affect performance in the year ahead, especially as the bulk of its yearly profits come from Asia.

Noel Quinn, HSBC’s current interim CEO has confirmed the job cuts as part of their upcoming overhaul and says the overall headcount of HSBC staff is likely to drop from “235,000 to closer to 200,000 over the next three years.”

Until recently, analysts had predicted a 10,000 staff slash ahead, but none imagined it would amount to a 15% cut of HSBC’s total global staff. Which regions the job cuts will affect the most is still unclear and unconfirmed.

Profits before tax dropped 33% in 2019 to $13.3 billion (£10.2 billion). The announced 35,000 job cuts should make way for a cost reduction of $4.5 billion by 2022, bringing profits before tax back to figures HSBC saw in 2018.

In regards to the coronavirus outbreak, Quinn has stressed that services and staff have been affected in mainland China and Hong Kong, and could continue over the next few months: “Depending on how the situation develops, there is the potential for any associated economic slowdown to impact our expected credit losses in Hong Kong and mainland China.”

“Longer term, it is also possible that we may see revenue reductions from lower lending and transaction volumes, and further credit losses stemming from disruption to customer supply chains. We continue to monitor the situation closely.”

For the investors

While HSBC's reported revenue rose 5% in the final quarter of 2019 the bank made a loss of $3.9 billion. The bank's share buyback scheme has been suspended but the dividend was maintained.

Finance Monthly heard from Ian Forrest, Investment Research Analyst at The Share Centre, who explains what this news means for investors:“Given all the bad news from HSBC today it was no surprise to see the shares going down 5.6% in early trading. While the bank is clearly taking action the changes will take time to feed through into the figures and the degree of uncertainty about current activity levels in a number of areas is likely to dampen sentiment towards the shares for some time.”

N26, which has a European banking license, is still one of the smaller challenger banks in the UK, but on April 15 it will be closing around 200,000 UK customer accounts. It has stated the reason behind this is difficulties surrounding Brexit, as the “timing and framework” of the withdrawal bill has made it impossible to continue operating in the UK.

Thomas Grosse, chief banking officer at N26, said: "While we respect the political decision that has been taken, it means that N26 will be unable to serve our customers in the UK and will have to leave the market."

Finance Monthly also heard from Forrester’s senior analyst Aurelie L’Hostis, who said: “N26’s launch in the UK might have felt like a natural next step back in 2018. The challenger bank had successfully attracted half a million customers in 17 European countries, and it could then use its European banking licence as a parachute. Yet, Brexit was already looming ominously in the distance back then – and there were questions regarding the validity of that licence post-Brexit. Beyond that, N26 entered the UK market on the heels of fast-moving rival challenger banks Monzo, Revolut and Starling Bank. Catching up was not going to be easy.”

All N26 accounts in the UK will function until April 15 as normal but will subsequently be closed automatically. Any money that customers fail to remove form the accounts will be placed in a holding account by default. It said UK staff involved in the business will move into other roles.

Other challenger banks like Monzo and Starling have UK licenses, which is why they likely won’t be pulling out of the UK anytime soon.

According to Alan Donnelly, Head of Financial Services at Salesforce, this year financial services will continue to move towards a different way of doing business; one that harnesses digital services for the good of the customer, and that will increasingly lead to partnerships between new challengers and traditional banks.

Below, Alan explains for Finance Monthly that as banking customers increasingly expect highly convenient and personalised experiences, they are in return willing to commit to wider and longer relationships.

In 2020 we can expect to see the emergence of new ecosystems that will blur the old and the new, as well as examples of financial services organisations of all shapes and sizes working together.

Challenger vs traditional bank

The current financial services market has seen challenger banks pitted against traditional banks. The wider FinTech world cannot be ignored either. Challengers are growing due to the agility, flexibility, ease-of-use and convenience of their platforms. They are digitally native, and designed from the bottom-up for a customer base which is becoming increasingly reliant on mobile.

But these young organisations do not necessarily have the wealth of data that traditional banks do. Incumbents possess information from individual accounts, gathered over many years, and have insights into how entire households spend and save – including substantial financial decisions such as taking out a mortgage.

These young organisations do not necessarily have the wealth of data that traditional banks do. Incumbents possess information from individual accounts, gathered over many years, and have insights into how entire households spend and save – including substantial financial decisions such as taking out a mortgage.

Traditional banks are becoming more agile and incorporating mobile more. Some, such as Barclays, Santander, RBS and HSBC, are evolving towards banking apps in a bid to compete with the challengers.

Customer journey mapping

This backlog of data that the traditional banks have on both the individual and the household allows them to create a comprehensive picture of the customer. This customer journey map is a visual representation of every interaction a customer has with their finance services provider throughout their lifetime. It tells the story of the customer’s experience as they progress through all touch-points between customer and financial institution, from initial contact and purchasing, to the ultimate goal of long-term brand loyalty. Here banks can demonstrate how they are learning from customer relationships and engagement throughout their entire organisation thus bringing it to bear in a meaningful context for their customers.

Many banks now realise the need to harness customer lifecycles through data and agility. By identifying those “magical moments” that make up their customers’ life, such as setting up a pension, buying a home or planning for a family, they can offer seamless and personalised services for all stages of the customer journey.

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Once these moments have been identified, banks can move from product to lifestyle services and so take the customer on long term financial journeys. Banks need to create a holistic view of the customer to pinpoint when a person may want to take out a specific loan, and so develop a personalised package before the customer starts to shop around, resulting in better services for customers, more pervasive interactions, and ultimately greater loyalty. Banks cannot afford to let conversations with customers lead to a dead end and so innovations in agile technology will capture, maintain and progress this dialogue.

Creating a future of partnerships

If financial services want to truly cater to the needs of the customer, we need to end this discourse of challenger vs traditional, and instead design services that are centred around the customer.

Ecosystems offer a marketplace of financial services that consumers can dip in and out of according to their needs, whether that be a mortgage or a student loan, to access the best products out of a large portfolio. This gives traditional banks the ability to be more agile through the need to stay relevant by enabling them to bring the best of these digitally-native apps and services to their customers, while in turn challengers get access to the data required to understand customer needs and habits. It also creates compelling new business partnerships as, for example, big financial moments like buying a home involve many complexities beyond financing.

We are already starting to see movement towards ecosystems with concepts such as Facebook Pay, which is consolidating payments across all of its apps. The focus now needs to be on providing platforms that consumers will go to for every aspect of their financial lives. Competition in financial services will shift from offering individual banking products to shared marketplaces with great services.

The next year will be a crucial time for the financial services sector. As banks begin to evolve their ecosystems, launch marketplaces and create new partnerships, it is the consumer who will ultimately see the benefit of agility and personalisation of financial services. The future is all about partnerships between old and new.

However, approximately a quarter of the global population (1.7 billion adults) do not have or have ever owned a bank account, based on figures by the most recent research from the World Bank Group.

Predictably, the results show that a large amount of the unbanked population originates in countries such as Nigeria, Bangladesh, China, India, Pakistan and Mexico; the developing part of the world. But perhaps unexpectedly, one of the main factors for a significant number of unbanked people in these regions is not always their income level.

Below James Booth, VP, Head of Payment Partnerships EMEA at PPRO, explains further for Finance Monthly.

About half of unbanked adults come from the poorest 40% of households within their economy. Minimal education and high unemployment is only a fraction of the explanation. Account costs regarding set-up and maintenance, as well as the lack of physical accessibility to banks, are major obstacles in many communities.

In Europe, countries like Denmark, Finland, Netherlands, Norway and Sweden have a 100% banked population. But, like any aspect of culture, the population of banked consumers can differ significantly from country to country. Take the Czech Republic, for example, with an 81% banked population and Hungary at 75%.

How is shopping online possible without a bank account?

In 2020, commerce is customer-centric. At a time when any device can become a point of sale, consumers expect a seamless, integrated shopping experience. The shopping habits of consumers – including the unbanked ones – must be taken into account when optimising their experience. A big part of that experience is the way people prefer to pay for their purchase. For example, the number of contactless payments made in the UK surged by 31% in a year to reach 7.4bn in 2018, meaning that the UK remains one of the highest users of debit and credit-based payment methods. However, this is not the case for the rest of the world.

Bank transfers, e-wallets, cash-based payments, and other local payment methods have previously been called alternative payment methods. But they are no longer the alternative; they are the norm for most of the world. According to a Worldpay report, 75% of all e-commerce purchases will be paid for via local payment methods by 2021.

Bank transfers, e-wallets, cash-based payments, and other local payment methods have previously been called alternative payment methods. But they are no longer the alternative; they are the norm for most of the world.

Oxxo, for example, is a cash-based payment method widely used in Mexico to purchase goods online. The shopper gets a transaction voucher from the merchant and then goes to an Oxxo convenience store with their voucher to pay the balance in cash. Then the merchant releases the goods for delivery. Cash-based payment methods are a low-tech solution for the unbanked who shop online. At the opposite end of the spectrum are high-tech payment methods, which continue to grow in popularity alongside increasing rates of internet and smartphone penetration.

57% (4.388 billion) of the world now has access to the internet and a further 67% (5.112 billion) have access to mobile devices, up 100 million (2%) in the past year, according to the latest Global Digital 2019 reports. In Africa alone, there are 444 million mobile users, which enables people, even in the most remote locations, to shop online via e-wallets. These e-wallets are linked to the user’s mobile phone account, which they can top up with cash and use to buy goods and services online.

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A growing customer base

Tapping into a new market isn’t the most straightforward task. Nevertheless, it is one that needs to be faced head-on by any business that wants to prosper and grow. Building a positive, smooth experience for customers can be complex, but there is a solution. Third-party payment experts and aggregators can deliver regional knowledge and financial and technical connections on an international scale, partnering with merchants (or their payment service providers) for an easier path to expansion.

The reality of the global population becoming fully banked is still some way off, and we can expect the payments market to become increasingly fragmented. Unbanked adults may still be a relatively small minority, but the gap between the banked and unbanked population is widening. And businesses that adapt to this market have a substantial advantage over those that don’t.

Banks are facing a set of at least four key challenges, and the platform model may offer a viable solution to ensure that banks are not outstripped by digital disruptors like Monzo and Starling, which understand that the way financial institutions interact with their customers has long needed an overhaul.

But why would the platform be a useful model for banks? Below, Matt Locsin addresses the key challenges for banks in today’s society and why transitioning to a platform-based model could answer those challenges.

 Becoming the plumbing

Banking institutions are starting to fear that they are increasingly perceived as a utility in terms of people’s financial management - the ‘plumbing’ of the system, while big tech companies can jump in and snap up the sparkly parts. Google’s reported foray into banking is a prime example of this fear coming to light, as Citigroup and Stanford Federal Credit Union offer the infrastructural support to a Google-labelled financial offering which takes care of the customer relationship.

However, banks have a huge opportunity here if only they can grasp it in time. Platforms connect people and services in an asset-free or asset-light model - in that they tend not to own the means of production, but connect consumers with those that do. There is a huge market of people who need help on major life activities that involve finance. If banks want to mean more to people than their electricity provider, they need to start providing the financial assistance people really need.

For instance: mortgages, car ownership, leaving home for a new rental lease - these are all transactions and contracts with moving parts that many people are ill-equipped to handle and for which they need expert help. Currently, banks are not providing the help needed. If they could evolve to become a platform for people to access experts who can help in these important life moments, they could become a one-stop-shop for people looking to make financial decisions.

If banks want to mean more to people than their electricity provider, they need to start providing the financial assistance people really need.

The vulnerability of a commercial income relying on net interest

Banking income focusing on interest margins and fees from retail banking is all well and good when bank rates are high. At the moment, however, they’re low - and this is a problem for banks.

That’s why they have monetised basic transactions - such as exchanging currencies. However, it’s this that has allowed disruptors like Revolut, Monzo and TransferWise room to breathe: customers are tired of being charged for something that should be simple. Banks need to find new types of transactions to charge for. Look at Airbnb - it is allowing SMBs to host ‘experiences’ as it expands out of accommodation. Uber now even lends its drivers cash.  Banks need to start applying this lateral thinking to the kind of transactions it can support and monetise.

The cost vs income ratio

Banks are expensive to run. The cost of compliance alone is enough to ensure banks have not historically had to compete with technology businesses. However, part of the expense comes from the mindset that banks are a kind of ‘product factory’ - selling unsecured lending, credit, derivatives and other financial products.

Transitioning to a platform led offering, in which revenue is generated in an asset-light model would mean that the business could be built on modular, inexpensive architecture in a lean talent structure. Legacy infrastructure cannot be magicked away, but banks can start to migrate to a lighter asset model to make any growth more profitable.

If they could evolve to become a platform for people to access experts who can help in these important life moments, they could become a one-stop-shop for people looking to make financial decisions.

Return on equity

Generating consistent returns for shareholders is a constant pressure for financial institutions. Platforms, however, are valued considerably higher than traditional business models.

Currently, banks have a very linear relationship with their customers: they see money as an input for a product, and consumers as users of those products. In a platform, the consumer and the supplier are the product. If we consider every participant in a platform as network capital, value is driven by users. This means that banks have a chance to fundamentally reframe their relationships with customers and acquisition of new customers, and to drive value through scale.

The reality is that banks are in many ways already a platform: they are a technology that connects people with assets and people who want to put those assets to good use. Centuries ago, when the bank came into prominence, this very idea was revolutionary. It’s time to start thinking big again and change the way banks monetise their businesses.

Millions of risk calculations flow through sophisticated banking software every day, to help the institution build an overall risk profile: Take on too much risk, and the bank could lose its customers’ trust, or worse. Take on too little, and the bank sacrifices growth.

Occasionally, banks face risks that they didn’t anticipate, or adequately plan for--from liquidity challenges, technology glitches and infrastructure failures to natural disasters, supply chain disruptions, and cybercrime. Such incidents unfold quickly and can take jarring twists and turns, requiring constant vigil over every new piece of relevant information that emerges.

Sometimes, instead of managing such risks, banks have found themselves wrestling with an unwieldy issue that grows into a full-fledged crisis, threatening the institution’s people, operations, and reputation.

In a 2019 survey from PwC[1], 7 out of 10 senior leaders said their company had experienced at least one major crisis in the past five years.

In the same survey, PwC identified the 19 most common crisis vectors that companies faced globally in 2019:

23%: Financial/Liquidity

23%: Technology failure

20%: Ops failure

19%: Competitive/Marketplace disruption

16%: Legal/Regulatory

16%: Cybercrime

16%: Natural disaster

15%: Leadership transition

14%: Supply chain

14%: Product failure

12%: Leadership misconduct

11%: Ethical misconduct

9%: Viral social media

9%: Geopolitical disruption

9%: Product integrity

8%: Workplace violence

7%: Shareholder activism

7%: Humanitarian

5%: Terrorism

Recent examples of banking crises abound.

In late 2019, Lloyds Banking Group told investors[2], its losses related to the ongoing payment protection insurance crisis had grown to nearly £22 billion. Its Chairman, Lord Blackwell, has agreed to step down[3] by mid-2021.

In 2016, American regulators levied tens of millions of dollars in fines against banking giant Wells Fargo, which admitted its employees had systematically opened fake accounts to hit aggressive sales targets. Then-CEO John Stumpf resigned, and in 2018, the institution agreed to pay $575 million[4] to settle state consumer protection lawsuits. The fallout, and related legal costs, continue to dog the bank.

Similarly, there are numerous recent examples of financial institutions facing technological failures, risks from new regulations, cybercrime and shareholder activism. On a routine, day-to-day basis, risk and crisis management teams at financial institutions monitor the safety of the bank’s physical assets, employees, executives and brand.

Customers, shareholders, and employees of banks increasingly expect that financial institutions will keep pace with the speed of the world and adjust to new demands promptly.

Increasingly, banks are turning to artificial intelligence to help them parse through billions of data points in public data sources to identify emerging operational risks. Artificial intelligence is capable of looking for patterns in unstructured data to detect risk faster than traditional sources of information, like news organisations or social media topic lists.

For example, in early January, the US Federal Aviation Administration announced it was halting commercial airline traffic over Baghdad, and portions of the Middle East, amid increasing tensions in the region following the targeted killing of a senior Iranian military commander. AI-powered software from Dataminr surfaced that alert to its commercial clients within seconds, prompting a large American bank to order an immediate halt to all employee travel to the region. Similarly, Dataminr’s platform quickly alerted its clients to the downing of Ukraine International Airlines flight 752, prompting that bank to immediately check if any of its employees or partners were on board.

Customers, shareholders, and employees of banks increasingly expect that financial institutions will keep pace with the speed of the world and adjust to new demands promptly. This speed is increasingly dictated by the rate at which public information breaks -- in real-time, every second, across thousands of data sources, in multiple languages and formats. The institutions that can extract value quickly from troves of public information will be best positioned to outpace competitors and deliver measurable value to all their stakeholders.

[1] https://www.pwc.com/gx/en/forensics/global-crisis-survey/pdf/pwc-global-crisis-survey-2019.pdf

[2]https://www.lloydsbankinggroup.com/globalassets/documents/investors/2019/2019_lbg_q3_ims_transcript.pdf

[3]https://www.bbc.com/news/business-50246479

[4]https://www.attorneygeneral.gov/taking-action/press-releases/attorney-general-shapiro-announces-575-million-50-state-settlement-with-wells-fargo-bank-for-opening-unauthorized-accounts-and-charging-consumers-for-unnecessary-auto-insurance-mortgage-fees/

Research by Triodos bank just a few years ago in 2016 indicated that over three quarters (77%) of UK adults supported greater competition from challenger banks.

According to Jamie Johnson, CEO at FJP Investment, such a confronting statistic suggests that alternative banks could offer certain opportunities that traditional banks lack. Below he shares more about the new and re-invested world of consumer finance.

Fast-forward three years, and today we are seeing floods of people opening accounts with newcomers like Monzo and Revolut. In fact, FJP Investment recently polled a nationally-representative sample of over 2,000 UK consumers and found that almost one in five (18%) have already made the transition from a traditional high street bank to a challenger bank. As one might expect, this number was significantly higher amongst millennials, with over a third (33%) claiming to have already made the switch.

The question beckons: why are UK consumers looking to challenger banks? And does this reflect a broader change within financial landscape?

Taking a wider view

Reflecting on the recent performance of the UK savings market more generally can offer valuable insight into why we’ve seen a notable rise in challenger banks. The market has undergone a fundamental shift in the last decade, particularly in the aftermath of the Global Financial Crisis of 2008 and, more recently, Brexit.

This climate of uncertainty has caused The Bank of England to be far more cautious in their decision making. Consequently, the interest rate below 1% for the past ten years, offering consumers little hope that their savings pots might grow. Meanwhile, the rate of inflation has been outstripping interest rates offered by most banks. Unfortunately, consumers are taking a financial hit, and seeing their hard-earned savings declining in value.

Indeed, the aforementioned FJP Investment research revealed that in the last 12 months alone, two fifths (38%) of UK consumers have seen the value of their savings decline.

Yet, the UK remains a proud nation of savers. Traditional savings accounts continue to be the bedrock of most people’s financial strategies, and will likely remain so for the foreseeable future: currently, over three quarters of UK adults (79%) hold some money in savings accounts. However, we cannot ignore the changing attitudes that have taken the market by storm – consumers are increasingly shopping around for alternatives that can better match their needs. Many are turning in the direction of challenger banks.

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Do challenger banks plug these gaps?

Startups like Monzo and Revolut are undoubtedly revolutionising the banking experience, with forward-thinking features and sleek app design proving to be increasingly popular among younger generations of savers. But apart from the attraction of a well-designed app, what else do challenger banks bring to the table?

For one, challenger banks typically offer better rates – of Britons who have joined digital-only banks, or intend to in the next five years, almost a third (31%) say this is why they made the decision. Other advantages, which influenced consumers to make the switch, include the ability to transfer money more easily (28%), free transactions abroad (22%) and the benefit of receiving real-time notifications about spending (22%).

For consumers who are keen to make their money go further, these digital banks offer convenient methods of financial management.

This last point is key: for consumers who are keen to make their money go further, these digital banks offer convenient methods of financial management. Many challenger banks offer individuals greater oversight over their finances and enable a better understanding their spending habits – and perhaps more importantly, digital banks also highlight ways in which they can improve their financial behaviour. For example, many of these apps come with real-time tracking of spending.

Beyond this, they also commonly include features which encourage saving. For instance, a consumer might utilise functions which round up expenses to the nearest pound, before depositing the remainder in a designated savings pot. For those with more long-term financial goals in mind, other functions might help users set monthly budgets and receive notifications if they are overspending.

The general point to note is that consumers are becoming savvier when it comes to saving, in turn making them less reliant on traditional savings methods that can fail to satisfy their needs. It’s encouraging to see more people seizing the opportunity to make the most of their money, and challenger banks are certainly helping.

In a recent interview with Finance Monthly, Dame Inga Beale discusses the current state of the insurance industry, drawing a contrast with the innovations occurring in banking.

“If you speak to some of the challenger banks, and you say, ‘who are your competitors?’ They say, ‘Oh, we don't really have any competitors. We're so unique, we're so different to the old banks that we don't really regard them as competitors.’” she said.

“It's interesting how they think they've created something so new and innovative that they don't even regard the old traditional incumbents as being a threat.”

It has been a memorable year for FinTechs, culminating in British challenger bank Starling pipping traditional firms to the title of Best British Bank. Business Insider Intelligence reported in October 2019 that 68% of consumers are using a checking or savings account with a challenger bank. 83% of those surveyed claimed they are likely to switch to a challenger bank in the next 12 months. Beale believes it is a focus on the consumer that has driven a revolution.

“Insurance I believe is behind banking. I think it's because we haven't been putting the customer at the heart of what we've been doing. They [challenger banks] have appealed to the young generation much more and have managed to brand themselves in a modern, exciting way. I think insurance has got a bit of catch up to do” she said.

“We [insurers] often traditionally look at things from our internal point of view. We segment customers according to the way we look at them; maybe by postal codes or something rather than the wants, needs, desires of the customers.”

“We often traditionally look at things from our internal point of view. We segment customers according to the way we look at them; maybe by postal codes or something rather than the wants, needs, desires of the customers.”

The insurance industry has also been slower to adopt the innovations of InsurTech firms. Usage-based insurance (UBI) is increasingly becoming the norm but the implementation of technologies such as Robotic Process Automation (RPA) has been slow to market. While 30% of companies adopted this technology to review claims in 2018, no insurers were using it to evaluate the risk of insuring a client in the underwriting process. Despite this, the market for underwriting improvements is set to grow to over 60% by 2020.

“Most of the insurers these days are investing in incubators or innovation labs. But to actually amalgamate them into your existing business is the tough call. There are not many [insurance firms] that have mastered that yet,” says Beale.

“If they don't learn how to amalgamate this new InsurTech and this new technology approach, the interaction with a consumer will suffer. Consumers want a different type of product that's more tailor-made, responsive. We need to think differently and incumbent large insurers, unless they adapt, will be left behind.”

A multitude of choice is available to today's insurance consumers. Beale pointed out the moves the industry has made to simplify the process.

“Consumers want to shop around and the price is important to them, so, lots of companies have responded by providing an online product where they're part of price comparison websites. That means the consumer can make instant decisions,” she said.

“Consumers want to shop around and the price is important to them, so, lots of companies have responded by providing an online product where they're part of price comparison websites. That means the consumer can make instant decisions."

Though price comparison websites have now serviced an estimated 85% of consumers, Beale believes they may already have peaked.

Beale says: “There might always be a place for comparison sites but I think this idea, that you will partner with a firm and they would be your financial support is much more likely to be the future. Therefore, you will have a strong affinity with that firm providing the customer service is up to it.”

“I think you'll shop around far less on price because we'll be using data triggers to feed in automatically, and you'll feel, actually, that pricing is fair because I only paid for the exposure I had on that day.”

Beale also admitted that there is a long way to go before customer loyalty reaches such heights to make a dent in the role of price comparison websites.

“We tend to have people buying insurance products that are very geared to specifics; so people will buy insurance for their car, insurance for their travel, insurance for their home. We haven't yet managed to package that up nicely so that the consumer's life is made simpler.” she said.

“We've got a long way to go to build that ecosystem around an individual and surround you with this nice bubble of the financial protection and support that you need in your life.”

Since leaving the demands of corporate life behind, Inga Beale has become a regular keynote speaker with the Champions Speakers agency, where she specialises in topics such as diversity and inclusion, insurance and business management.

Mobile payment solution M-Pesa is widely adopted in Kenya and across the wider continent, with over 30 million people using the service to send and receive money. TymeBank is also hoping to become a household name in South Africa. It claims to be South Africa’s “first fully digital bank”, and recently launched its EveryDay account.

However, the big traditional branches are also getting in on the digital action and Standard Chartered is making a big play. A multitude of digital banks have been launched, and there are more to come. Jaydeep Gupta, region head of retail banking, Africa and Middle East at Standard Chartered, tells Global Data’s Retail Banker International that this is just the beginning.

“We have now launched digital banks in eight markets within 15 months as we have seen a growing demand for convenient banking in Africa. In line with this, we will be launching our digital bank in Nigeria which follows the eight digital banks which we have already launched so far. We are also working on the roll-out of the SC Keyboard to additional markets in Africa. This includes launches in Botswana, Zambia, Zimbabwe and Nigeria throughout the rest of the year.

“The SC Keyboard platform allows customers to access a variety of financial services from within any social or messaging platform without having to open the banking app. It can be configured as the default keyboard on any smartphone, making banking quick and seamless for customers who no longer need to log into their SC Mobile app for basic banking services.”

Africa is generally perceived as a cash focused continent, and while cash is still popular mobile money is catching up fast.

Gupta says: “There is still quite a high prevalence of cash usage on the continent, but you just need to look at how well mobile money has taken off over the past decade to know that Africa is moving away from cash. Mobile money is now active in 31 countries in Africa, with 84 million active mobile money accounts.”

This massive expansion in digital begs the question of whether there is still a need for the old brick and mortar establishments?

Gupta concludes: “Retaining the ‘human’ element in banking remains crucial. While digital channels are undoubtedly more efficient, hold lower error rates and have decreased cost-to-serve ratios, finding the balance between traditional and digital banking services is the key to providing exceptional customer service. Customers will always require an element of human interaction and, at Standard Chartered, we are focusing on fusing these offerings in order to provide a seamless customer experience.”