Are the digital start-ups ready to take on the incumbents in the world of business banking?


Digital banks are gearing up to take the incumbents but will they survive? (Revolut)
The internet has rattled every industry to its core, except one — business banking.
For most bosses, while they may trust Amazon to deliver a loved one’s birthday present or not think twice about letting Uber take their staff home after a late shift, when it comes to handling the company money, online banks still have little appeal.
As a result, the scene remains dominated by Lloyds, HSBC, Barclays, Santander and RBS, who hold 88 per cent of all business current accounts.
This is despite the recession in 2007 which hurt many of their reputations, and the Government’s attempts to encourage challenger banks.
Banking experts say that heavy regulation and compliance costs make the industry hard to break into for start-ups wishing to challenge the status-quo.

James Gibson, head of business accounts at start-up bank Revolut, says: “A good example is payment networks, the system by which banks send money around the world, are not like the internet and are hard to tap into. Compliance costs are huge and put many off.”
Oak North bank
Founded in 2015
Lends to businesses with £5m to £100m in turnover
Loans vary in size from £500,000 to £30m
£4m — average loan
Loan book to date stands at £1.25bn, no defaults
Has loaned to 270 businesses so far
Banking licence? Yes
But there are signs that the industry is changing as a string of digital business banking start-ups like Revolut begin making their presence felt.

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The Financial Conduct Authority and the Prudential Regulation Authority have adapted the rules to grant temporary “e-money licences” for new banks while they prepare the lengthy documents needed for a full banking licence.
This year has seen digital bank Starling launch its business current account, following rival Tide in early 2017.
Tide says it now gets one in 12 new business current accounts opened in the UK. It has passed 35,000 customers and served £1 billion of transactions.
Starling believes it can capture 6% of business current accounts by 2025.
Atom Bank
Founded in 2014
Began lending to businesses in 2017
Has so far lent £150m to business clients
Has raised £200m equity funding from BBVA, Woodford and others
Has had £300m total SME loan applications
Banking licence? Yes
Analysts say entrepreneurs are opting for these new digital banks as their modern IT systems mean they can open accounts speedily.

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Tide’s quickest account opening time is two minutes and 14 seconds, a stark contrast with Lloyds or NatWest, which can take weeks handling paperwork.
Anne Boden, founder and chief executive of Starling, says: “It’s hard for a new business opening an account at a bank branch. It usually takes three meetings. With us you just download the app. Our superior technology means we can screen a potential customer in minutes and say yes or no.”
Digital banks are not just a place to park money. Some, such as OakNorth, also lend.
OakNorth specialises in business loans to property developers and this year is on course to lend a total of £1 billion.
Starling bank
Began offering business accounts in March this year, has signed up 5,000 customers so far
Believes it can capture 6% of the business current account market by 2025
App offers accounting and invoicing services
Banking licence? Yes
Again, its attraction is the speed with which it can make a decision on a loan. OakNorth’s technology scans hundreds of websites such as Rightmove and Trip Advisor to assess the risks around a potential property project.

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Latest deals include a £10 million loan to developers for a four-storey apartment building project in Hackney and a £20 million loan to Brasserie Bar, the French brasserie business inspired by Raymond Blanc, so that it can develop 24 new sites.
Last year OakNorth turned a £10.7 million profit, silencing critics who doubted its model could work.
Others include Atom, which has so far lent £150 million to firms in manufacturing, retail, leisure and property.
Founded in 2014
50,000 business accounts across Europe
Raised $250m in Series C funding last month
Business customers can hold, exchange and transfer 25 currencies with no fees
Due to launch business lending in next few months
Banking licence? No – e-money licence
But analysts have warned there are pitfalls to the digital banks’ rise, in particular from rising interest rates.
Andrew Wright, director at PwC, says: “If interest rates go up then the cost of certain products will too. Digital banks offering deposits will have to pay out more and they need to build this factor into their models.”
Others in the industry believe the wave of digital banks are more likely to be snapped up the big five rather than survive as a standalone businesses.
Digital banks say a rising interest rate environment is something they can combat and are prepared for. If they can ride out that wave, then maybe they can really land a punch on the big boys.
Launched in 2017
Has more than 35,000 members
Passed £1bn transactions in March
Fastest account opening time: 2 minutes 14 seconds
Fastest credit application to money in the account: 3 minutes 24 seconds
Banking licence? No – e-money licence
In association with Aviva Digital Garage


Via: Evening Standard