The big banks and their challengers
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A pack of increasingly aggressive competitors is snapping at the heels of the big high-street names, who have a job on their hands to regain public trust.
It seems things can always get worse for the big banks, with the Barclays rate-fixing scandal the latest entry in a catalogue of PR catastrophes.
As a result of this unprecedented low in banks' reputations, anyone who sets themselves up as a challenger to the five high-street behemoths is almost guaranteed a warm reception from the press, a friendly welcome from the government and a flood of applications from businesses looking for finance.
Although Virgin Money's acquisition of Northern Rock brings one of the UK's most recognisable brands into the high-street banking sector, Aldermore is perhaps the quintessential challenger bank. It was name-checked by chancellor George Osborne in his latest Budget speech, and its CEO and founder Phillip Monks recently commented on the Libor-fixing scandal to Thomson Reuters, 'I would like to see in the next five to ten years a scene in the UK where, instead of having four or five big banks, you've got a dozen medium sized banks none of which are too big to fail in their own right.'
But the challengers are not just other banks. The rise of crowdfunding websites, brought once more to public attention with the UK launch of Kickstarter this week, is generating at least an equal quantity of column inches. Our sister website SmallBusiness.co.uk has responded by releasing a digital guide to crowdfunding, which has interviews with all the main players and practical advice to businesses on raising money.
Like the challenger banks, crowdfunding websites promise a better deal to both borrowers and savers. They do this by cutting out some of the middle men and running leaner, more efficient operations. It's important for businesses to recognise they will not necessarily get an easier ride than they would at a bank: these sites have to protect their investors if they want to keep their reputations. But at least the application process is relatively simple and you'll get a yes or no quickly. The same applies to Wonga, which has recently branched out into business loans.
There will, of course, always be a place for large banks. Only the wildly optimistic would expect them to be replaced by a smorgasbord of small operators or a plethora of 'disruptive' websites. Though the big five did not reach their Project Merlin target for SME lending last year, they still advanced almost £75 billion to businesses. Crowdfunding websites have lent less than 1 per cent of that total since they sprung up a couple of years ago – though their growth is quick, as the counter on Funding Circle's homepage shows.
The significant aspect of this is not so much that anyone expects crowdfunding to replace banks, or Virgin Money to topple RBS. For the moment, the major battle is not for market share, but for public trust and the moral high ground. And despite their massive marketing budgets, the banks are losing.