Metro, Starling and ClearBank have won a share of a fund aimed at boosting competition in the business banking sector.
The challenger banks have won a grant worth a combined £280 million from the Royal Bank of Scotland’s capability and innovation fund that forms part of its alternative remedies package.
Metro won the largest share of the first pool of the grant with £120 million, followed by digital-only bank Starling with £100 million and then £60 million for ClearBank, which applied for the grant with partner Tide.
Further grants for other pools of the fund will be awarded later this year.
RBS’s £775 million alternative remedies package is part of conditions attached to its £45 billion Government bailout at the height of the financial crisis and the cash is being distributed by the Banking Competition Remedies (BCR) body.
The £425 million capability and innovation fund is aimed at helping bidders develop their current account, lending and payments offerings for business customers.
Godfrey Cromwell, BCR’s chairman, said: “These awards seek to increase competition in the business banking market and to improve the financial products and services available to SMEs (small and medium-sized enterprises).”
Craig Donaldson, chief executive of Metro said the grant will help the bank “accelerate our plans to revolutionise banking for SMEs. It will help us bring much needed competition to the underserved SME hotspots in the north, while investing in our digital capabilities and creating new jobs”.
Metro being awarded the largest share of the grant comes at a contentions time for the bank after it revealed that its miscalculated the risk weighting on commercial loans.
To correct the mistake, Metro needs to raise over £300 million according to analysts, which would risk diluting its share capital.
Meanwhile, Starling has pledged to use its grant to create nearly 400 new jobs in the UK and to invest £94.8 million of its own money to bolster its offering to SME customers.
It said that will make £913 million of balance sheet lending available to SME customers by the end of 2023 and that it aims to capture 6.7% of the business banking market within five years.
Anne Boden, Starling’s founder and boss, said the grant will “accelerate our ability to reshape the SME banking market”.
“Starling will deliver an advanced fully-digital offering that connects SMEs with the financial solutions they need to thrive. This is the opportunity to bring new technology and a new approach to the sector.”
ClearBank, the first clearing bank to launch in Britain for 250 years, teamed up with SME specialist platform Tide to apply for the grant.
Tide’s chief executive Oliver Prill said the grant will help the company grow market share and that it will match the grant with further investment of its own.
In December, eleven banks, including Starling, Monzo and TSB, won a share of a separate £350 million incentivised switching scheme, which encourages SME customers to ditch their RBS account for rival banks.
The RBS package is intended to boost competition in the banking sector, but Stuart Chalmers, head of UK commercial banking at consultancy Accenture, doubts that the fund actually will because many SMEs are reluctant to switch lenders.
“With strong customer loyalty and unconvincing switching incentives, the RBS remedies package’s goal to disrupt the market looks currently unachievable.
“Growing demand for digital services may present an opportunity for challengers to begin to assert themselves, but crucially, customers want these services from their existing trusted providers.
“This reluctance to switch however, doesn’t mean leading banks should stop working to improve their services.
“Banks need to keep up with the pace of change and those that invest in the day-to-day experience of customers, capitalising on demand for digital and traditional services, stand the best chance of solidifying customer loyalty and retaining their market share.”