Part One: How challenger banks can lead a fair economic recovery from COVID-19

COVID-19 has raised profound questions about fairness in our society. While the full economic consequences of the pandemic are yet to reveal themselves, there is an opportunity to put fairness at the heart of the recovery.

We believe challenger banks can and should play a key role in this – their innovative and tech-led services can help both businesses and customers to reclaim firmer financial footing. In parallel, this will help challenger banks expand beyond their core customer bases, broadening access and accelerating market capture.  

Over the next three weeks we will explore how they can do this by focusing on three key areas: 

In Part One, Josh Gavzey looks at how challenger banks can support small and medium-sized businesses that have been hit hard by the pandemic. 

Focusing support on the small and medium-sized businesses affected most by the pandemic 

Small and medium enterprises (SMEs) make up more than 5.7 million organisations, over 99% of all businesses in the UK1. Research shows nearly half of SME finance is provided by lending from large UK banks2

2020 has been a tough time for the UK economy due to the Covid-19 pandemic, where GDP has fallen by record amounts and the squeeze has continued through Q4 2020 and into Q1 20213 with national lockdown closing some sectors and significantly affecting many more. Government intervention such as the Bounce Back Loan scheme, business rate relief and financial support to furlough workers has enabled businesses to continue to survive and supported jobs. However, this support has turned some businesses into zombie businesses, only able to survive in an environment of government support, as that support is withdrawn there is a likely increase in business failures.  

The rate of issue of new business debt doubled in 2020 with around £26bn4 in bank borrowing. This debt often being used to maintain current operations rather than funding growth. SMEs will turn to their banks in times of stress to ensure continued support and to inject additional working capital, those same banks will need to ensure they treat these businesses fairly. We can point to times in history some large institutions have been criticised by the Treasury Committee for their treatment of small businesses for example in 2008 during the recovery from the 2007 financial crisis where there was “widespread inappropriate treatment” leading to “material financial distress”. 5 

We believe that now is an opportunity for challenger banks to look to the future as the UK economy recovers and enhance their offer to these businesses. What can the challenger banks use to maximise this opportunity?  

1. Changing demographics 

2. Using newer, more agile technology platforms to provide a competitive advantage?  

3. Trust and high-quality customer service as the lever to reduce resistance to change?      

1. Changing demographics 

Ensuring that SME strategy both focuses on the longer-term prospects of their SME customers rather than short-term profit which has caused some of the scandals of the past. Building a loyal customer base and recognising the fact that Millennials, who are more likely to use a challenger bank for their personal banking needs, are now moving through middle and into upper management at larger SMEs.    

2. Agile technology  

Challenger banks could look to develop partnerships and support integration with FinTech companies. Providing enhanced solutions to SMEs to capitalise on the trend which accelerated during 2020 in the move from cash to digital payment transactions. Use the enhanced customer service offering, be developing programmes supporting SME engagement with Open Banking building on the integration with  accounting platforms to help businesses digitise and streamline operations. 

3. Trust  

One of the big selling points of the newer challenger banks is the desire to offer better customer service. At a time where businesses are struggling to maintain cash flow and operations, the ability to connect with a real person at the bank will increase trust and offers a real difference to the large banks. Maintaining or increasing investment in customer service is key to this.  Banks should always approach business restructuring and debt recovery with fairness and transparency in mind. Avoid ‘black box’ decisions and use effective communication where customers are struggling financially.  

Look out for Part Two next week, where we will analyse how challenger banks can earn the trust of new customers, boosting their market share and offering consumers greater choice. 


Media Enquiries
For more information please email


Joshua Gavzey  Senior Consultant