The Royal Bank of Scotland’s £425m fund was created with the best intentions.
Launched last year, the Capability and Innovation fund aimed to fulfil European state aid conditions arising from the bank’s £45bn bailout during the financial crisis.
The fund will be split into different grants to help “challenger banks and other financial services providers” diversify and develop their business current account offerings for small and medium-sized enterprises, or SMEs.
Yes, it could give business banking a welcome infusion of cash and competition, but only if the money is handed to new entrants, and doesn’t find its way into the already deep pockets of established players.
While the fund’s primary goal is to cut RBS’s market share and increase competition away from the big four banks, which already have around 80 per cent of the SME market, there are growing concerns that this goal could be undermined.
These institutions already have significant funding and an extensive high street presence, but have failed to capture more than a modest market share among SMEs. If they are awarded money from the RBS fund, an important opportunity to really disrupt the market by channelling the money to the new generation of startup, or challenger, digital banks, will have been lost.
Banks must have assets of less than £350bn in the UK to be eligible for the fund. Santander has £300bn, TSB £42.5bn, and Clydesdale £43.2bn.
These companies are likely to put forward a case that either involves significant IT transformation and branch expansion. But neither of these will deliver a materially better outcome for UK SMEs.
Some of these bigger players have already established large and expensive branch networks, investing millions in a strategy that has only had a modest impact on their SME market share.
None of these banks have a track record of delivering technology and innovation. And even the larger award of up to £120m will not be sufficient for institutions of their size to deliver meaningful technological change.
Contrast this the new wave of mobile-only banks that are changing the face of banking. These businesses are starting from scratch, building their own proprietary technology from the ground up, delivering more at a lower cost and in less time.
They can give SME customers accounts that can be opened in a matter of minutes without a branch visit, and provide fast, easy access to finances without the traditional bureaucratic trappings of bigger companies.
The RBS fund has a chance to truly disrupt the market by supporting real innovators. But there remains a risk that it could merely further entrench the big players, at the cost of entrepreneurs and small business owners.