Young SMEs and companies that have recently switched banks are prime UK neobank targets

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UK small- and medium-sized enterprises (SMEs) are fairly satisfied with their current banking situation, which leans heavily in favor of major incumbents: 88% of financial decision makers at UK SMEs say their main account is with an established high street bank and 86% are either “very happy” or “fairly happy” with the service they receive, per a report from Finastra and YouGov. Further, just 29% of SME respondents said their business would be likely to switch its main bank account in the next five years.

While UK SMEs may seem relatively entrenched with their current banks, there are two potentially lucrative targets for challenger banks:

New companies. Among SMEs under five years old, the share of respondents who said their business will switch banks in the next five years swells to 46%. And these younger businesses seem less predisposed toward incumbents: Only 78% of the businesses in this category use high street banks, which, while still high, is a 10-point drop off from 88% overall. For these reasons, new SMEs should be a major target for challenger banks, who could attract them with an easy and fast onboarding process or by collaborating with startup incubators, like Techstars or IncuBus, to network with prospective business founders before their companies even get off the ground. As an extra measure, challenger banks could partner with business management services firms to offer both banking services and tools to help new companies get started.

Companies that have recently switched banks. Twenty-three percent of SMEs said they switched banks in the past year, and these companies show a higher preference for digital-forward services: 17% cite stronger digital or mobile offerings as a reason to switch banks, versus 9% of all respondents who said the same. And 53% of financial decision makers at companies that have recently switched banks said their business would be likely to switch banks again in the next five years, making them ripe for challenger banks with strong digital banking offerings to poach. But this is a double-edged sword: The same propensity that's led recent switchers to change banks in the first place means there's a chance they'll do it again.

Some challenger banks are already mobilizing to draw in SMEs and could benefit from focusing on marketing to these target segments:

Starling, which launched to single-owner businesses 16 months ago, is expanding access to its SME account services to companies that have multiple owners. This will give it a larger pool of potential new clients to draw from.

And Revolut bolstered its suite of business products in all markets with two new types of fee-free business accounts that include features such as multicurrency support, virtual cards, and all-day support. These tools enhance the convenience of the neobank's offerings, which could help it stand out from competitors in the fight to acquire business customers.

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