High street banks’ SME lending comeback won’t rattle challengers
High street banks are flocking back to small- and medium-sized enterprise (SME) lending but face a battle against fintechs which have captured their spot.
The Big Four banks have shed their market stronghold in SME lending. Research from the British Business Bank in March revealed challenger banks make up around 60 per cent of gross lending, compared to nearly two decades ago where the four largest banks made up 90 per cent of SME lending.
But fresh data from UK Finance suggests the legacy lenders are making their return.
Loans from high street banks to small businesses reached their highest since 2022 in the first quarter of the year at £4.6bn. This marked a 14 per cent year-on-year jump.
Their return comes after digital banks secured sky-high revenue growth from clawing growing market share, but are now faced with the return of legacy lenders.
Gautam Pillai, head of fintech research at Peel Hunt, told City AM the “renewed focus from high street lenders” was good news for the SME sector and highlighted the “growing demand for business finance”.
But Pillai noted fintech firms had “carved out a strong position” in the market through tailoring tech developments around the needs of SMEs.
Allica and OakNorth’s rise
Fintech darling Allica Bank has positioned itself as the only full-service digital bank specifically built for SMEs and has reaped the rewards as a result.
The digital bank, led by ex-Revolut executive Richard Davies, increased profit 86 per cent to £29.9m in 2024 and was dubbed Europe’s fastest growing start-up by Sifted.
Allica launched a Business Rewards Account in 2024, which helped its customer base triple to over 6,000.
Pillai also cited the developments of OakNorth, which has secured a spot in the top one per cent of banks globally for return on assets.
OakNorth has begun the rollout of business current accounts, cards and payment services specifically tailored to the SME framework.
“Large banks bring scale and trust,” Pillai said, “but adapting existing systems to deliver the same level of speed and personalisation can take time.”
He identified the speed of innovation as the key weapon in fintech’s arsenal as it fought for its market space.
Big banks under government pressure
Ministers called in the bosses of banking giants earlier this year after a report from the Department of Business and Trade revealed overall loan success rates for small businesses applying for bank finance were below 50 per cent – down from an approval rate of 67 per cent in 2018.
The Big Four banks – Barclays, HSBC, Natwest and Lloyds – have faced renewed pressure to support SMEs amid Chancellor Rachel Reeves’ push for economic growth.
But the size of the market could help swerve a locking of horns between the old school banks and the young fintechs.
“The market is large and growing and we’re increasingly seeing opportunities for collaboration between banks and fintechs rather than direct competition,” Pillai explained.
Traditional lenders have already begun to leverage the abilities of fintechs, with Lloyds extending its partnership with PayPoint at the end of 2024 to more than 60,000 small and medium enterprises (SMEs).
HSBC has also deployed the network of fintech platform Tradeshift in its launch of SemiFI, which aims to deliver Seamless Embedded Finance solutions to business clients.
Kunal Jhanji, UK leader on payments and fintechs at BCG, told City AM: “The return of traditional banks is not an existential threat to fintechs.”
Instead, Jhanji said it demonstrated the “fintech model’s success” as incumbent banks sought partnerships “to expand their reach rather than compete with them”.
Fintech’s future in b2b
Neobanks were thrust into profitability in the last few years as interest rates spiked to a post-financial crisis high of 5.25 per cent.
But as rates come down, the firms are expected to feel the crunch.
Firms may turn to the booming SME lending sector in a bid to scale up and shift operations to a business to business (b2b) model.
Pillai said the growth of the market was “clear proof” of b2b opportunities and came amid a “structural shift from consumer-focused growth plays”.
The agility, digital-first and data-rich approach of fintechs mirrored the needs of modern small businesses, Pillai added, making them a natural fit for the sector.
Jhanji said a “combination of tailwinds, including increased private credit funds, improving data models, and a more favourable rate environment are fuelling growth in [SME lending]”.
He added fintechs had only just “scratched the service of the global lending revenue pool” meaning the opportunity ahead was significant.
Fintechs accounted for just three per cent of the global lending revenue pool in 2024.
As big banks refocus on the SME market, fintechs may use the lenders as a vehicle of expansion, as opposed to a rival.