In recent years, challenger banks have been revolutionising business banking. While it started as prepaid cards and current accounts for individuals, the challengers are now expanding their markets. With more innovation in sight, businesses are no longer limited to using a traditional high street bank for their business banking needs.
Challenger banks compete with the established names and give businesses more options to choose from to manage their finances. With over 27,000 SMEs switching to challenger banks in the first half of 2019, we review the benefits of challenger business banks vs high street banks.
Pros of challenger business banks
Reduced fees
Traditional banks often charge monthly fees for their premium business accounts. On the other hand, challenger banks like Tide or Revolut don’t charge monthly fees for their standard business bank accounts. Revolut was considered especially disruptive by eliminating foreign currency fees on international transactions. Other challengers like ANNA charge a small fee.
This reduction in cost could be a game-changer for start-up and small businesses who are trying to manage their costs and save time on paperwork for more business critical activities.
More forgiving of bad credit
For businesses whose credit makes them less eligible for high street loans, challenger banks could be a solution to find funding. Some challenger banks can offer loans based on lower acceptance criteria than high street ones, and this may help in your search for a suitable loan.
Best in class customer experience
From setting up your account quickly via video, to creating a budget and easily tracking how much you spend, the challenger banks’ digital experience makes both business and personal banking easier and less complicated.
Business challenger banks also tend to invest heavily in improving their offering, with innovative features being launched at speed. Businesses can take advantage of new functionality to manage their business, such as invoice creation, receipts and budgeting tools being especially useful for freelancers and small businesses who do not necessarily have the accounting personnel for these financial operations.
Nic Redfern, finance director of Know Your Money explains “challenger banks are digital-first and therefore tend to innovate quicker than high street banks, since challenger banks need to provide a better user experience than high street banks to gain market share.”
Flexibility when abroad on business
Challenger banks allow you free spending abroad to easily withdraw money or transfer money without any fees. In the consumer market, challenger banks are fast becoming popular options for holidaymakers looking to avoid fees for using their card overseas. They can also be used alongside a traditional bank account to budget and keep track of one’s spending while on holiday.
For businesses that regularly send employees or money abroad, this could become a real money saver.
This is yet another example of how challenger banks are looking at the key pain points for their customers, and improving the customer experience.
Pros of high street business banks
High street banks heritage and security
When you are comparing business banks accounts, as a business owner you want to ensure that your money will be safe.
The reputation and heritage of the UK’s biggest banks is well known, and often business customers will remain loyal to the same bank that they know and trust.
This reputation can give businesses peace of mind that any money they have with the bank should be safe, whereas some challengers may not have this level of business security, such as Financial Services Compensation Scheme protection.
Financial Services Compensation Scheme
With leading high street banks, you are also covered by the Financial Services Compensation scheme (FSCS) to up to £85,000.
This is not always covered with all challenger banks so it’s something to keep in mind when comparing challenger vs highs street banks.
Business credit and loans
High street banks are established in being able to offer credit and business loans to their customers. This is often an essential aspect of a business bank account, and it’s not a space that many challengers can compete in.
Although some challengers are starting to roll out this functionality, they tend to be behind the curve compared to their street counterparts. Business banking customers should think carefully about what features they need, and ensure that if they are considering a challenger bank, those features are available, or at least in their roadmap for the future.
As we have seen with the Covid19 Business Interruption Loan and Bounce Back Loan schemes, initially only the established banks are able to offer these with new challengers waiting for approval to be included.
Are challenger banks or high street banks better for businesses?
Challenger banks can potentially offer better services and features for users, as well as drive down costs and innovate quickly the same way they have for their personal banking customers. However, the security and ability to borrow from high street lenders is a real strength. The right option won’t be the same for every business and depends on their own unique business goals.