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As we all look around us and listen to expert opinions from learned economists predicting an ‘alphabetti spaghetti’ recession – V shaped, U shaped, L shaped or W shaped (is that 2 V’s or 2 U’s?) - it’s certainly a very interesting time to be launching a challenger bank!

COVID-19 continues to devastate societies across the globe with terrible consequences including the loss of lives and livelihoods. While this article does not seek to downplay the multitude of tragedies many have faced, I sincerely hope it does offer an element of optimism to the UK business community in these challenging and uncertain times.

For those readers who aren’t aware, I am the Chief Risk Officer for Alba, a Scottish based start-up business currently going through the application process for a UK banking licence;  when our license is granted, we will be called Alba Bank. We are aiming to service the small & medium size enterprise (SME) market with a focus on the Scottish, Northern Irish and Northern English markets, but aspiring to a footprint across the UK. We will principally provide lending and savings facilities with a real focus on establishing and maintaining relationships to help our customers’ businesses realise their potential. 

An unprecedented time for UK SMEs

The UK SME banking market has traditionally had many challenges in meeting the aspirations of their customers, however these gaps are even more prominent at the moment, given the damaging impact of COVID-19 on the business community.  

I thought that a perspective from us at Alba would be of interest at the moment, as we look into the unprecedented emerging situation in the British, and indeed global, economic landscape. Despite the dramatic changes that are occurring in the business world, we do see a unique opportunity for a lender like Alba in helping businesses and the wider economy (and thus our wider communities) recover.

As one of the few digital, entirely public cloud based, modern technology firms in this market place, we are proud to offer a unique approach to building human relationships with our customers and cutting-edge technology which truly makes us faster and more efficient, allowing us to make a real difference in the UK SME banking sector.

As we see a gradual reopening of the economy, and wait for the economic statistics that will indicate which letter shape recession we are following, I think there is unanimity among economists that one way to make things worse will be a second ‘credit crunch’ among lenders, and unfortunately there are a lot of issues emerging that appear to impinge on the incumbent banks ability to fund SMEs to the levels required.

Much to consider for incumbent banks

We are delighted to have reached the stage where we expect to receive our banking license with restrictions soon, as launching a new challenger bank can be riddled with significant hurdles to overcome. However, we are fortunate in that what we are building is from the ground up, avoiding many of the obstacles facing incumbents that are making the headlines such as;

  • Incumbent banks have serious challenges in their existing books, from potentially large impairment levels, emerging fraud and AML issues, data breaches and conduct challenges on emergency processes, to even potential withdrawal of government guarantees for some where lending hasn’t met the expected standards

  • Issues in pre COVID-19 processes, technology and business practices that have been shown to need significant investment, restructuring and replacement, all of which will drain management time, money and attention

  • The changes in underlying behaviours, information and data on which key models have been built mean that these are no longer reliable, and where automated lending and processes have been built on these models there are no easy answers on how to react, and often no manual expertise to fall back on

  • All of this is leading to relationship breakdowns between lenders and customers as we are seeing reported, where having a personal relationship, and a knowledge of the customer has never been more critical

  • The usefulness of automated lending models based on pre COVID-19 data – models based on data that is obsolete and historic relationships that are now uncertain

  • Whole new segments of first time borrowers in the SME space as non Ltd company businesses that have never borrowed before are entering the market.


Why launch now?

With all these difficulties that banks are expecting to face, you might be asking why would we consider launching a bank now? Well, the key for us is that a lot of these factors highlighted above either don’t impact us, or are already addressed in the bank we are building.

We will be one of the very few fully Public Cloud hosted, digitally native banks in the UK; with no legacy back book, we are entering the market with systems, processes and products that are already designed and built to address the issues a challenger bank is typically faced with.

Similarly, by leveraging best in class data assets from across the range (open banking, bureau, direct bank account same day access), coupled with a relationship based model using experienced specialist underwriters, we are not encumbered by pre COVID-19 models and approaches that will be difficult to fix and very resistant to different approaches (it’s hard to see an automated centralised lender moving away from such a model nimbly).

In conclusion, hopefully you can see where our optimism about helping us all to come out of this terrible time as fast as possible is coming from! We can’t wait to become an operational bank next year and give the UK SME sector the financial support it undoubtedly deserves. Watch this space…

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