As a condition of its government bail-out, RBS has been tasked with boosting competition in the SME business banking sector. A pot of £425 million has been used to support challenger banks to increase and improve their offerings for small businesses.
A further £275 million is being used to incentivise RBS business banking customers to switch banks. Business account switching has seen a steep increase, in part due to the incentives of the scheme.
(If you are switching accounts for ethical reasons and want to write to your previous bank to let them know why, we have published a template letter for you to use.)
Most of the first pot of cash has gone to challenger banks such as Metro, Starling, and Tide. But the scheme has been criticised for being opaque and having made questionable decisions. Serious irregularities were identified on Metro’s balance sheet before it received £120 million, and Starling’s CEO had a close relationship with the executive director of the body overseeing the distribution of the funds.
However, it is questionable how much of a shake-up will really be delivered by these packages. Notwithstanding the manifold issues, including a lack of transparency in awarding funds, the scheme appears to leave the power of the other four banking giants relatively untouched.
App-based business banking
It’s clear that in a bid to disrupt the ‘legacy’ high-street giants, most new banks are focusing on digital services. This makes sense, as the vast majority of small business’s financial activity is now conducted online.
After price, quality online and mobile banking is the top priority for small business owners when choosing a bank.
The growing assortment of primarily app-based business account providers, including Starling, Monzo, Revolut, Tide, and Coconut, offer not only their own account but also access to software that can manage other bank accounts and company financial administration.
However, the inability to provide face-to-face financial advice, the one activity that small businesses still prefer to do in-branch, means the lack of bricks and mortar will continue to be a double-edged sword for online-only banks.
Challenger bank ethics
The new banks are generally more ethical than the established names. However, it is an open question whether this will remain the case.
Starling Bank, for example, has some good statements on avoiding investment in certain industries such as fossil fuels and arms manufacture. But its environmental reporting and transparency commitment is not comprehensive.
The Starling website also names its leading financial backers as Harald McPike, reported to be a “secretive Bahamas-based investor”, and Merian Global Investors. Merian was recently acquired by Jupiter Fund Management PLC, a company that receives our worst rating for likely use of tax avoidance strategies. With Starling’s sights set on rapid growth and an initial public offering in the coming years, it will have to work hard to not let its first ethical steps be diluted by the world of unethical finance.
Starling, Metro, Tide and Coconut all lose marks for lacking adequate environmental and carbon reporting.