Lending to customers by UK challenger banks reached record £115bn last year

04 February 2020

  • Challenger banks helped fill post-credit crunch lending gap
  • Lending has doubled in the last five years but is slowing down as challenger banks moderate their risk appetite

Lending to customers by UK challenger banks has more than doubled in the last five years to a record high of £115bn*, says accountancy and business advisory firm, BDO LLP.

A wave of challenger banks were set up after the credit crunch to fill the gap left in the market by high street banks, particularly targeting under-served market segments like small businesses.

Whilst lending to customers increased in each of the last seven years (see graph), some challenger banks have reduced their risk appetites and slowed the growth of their loan books. Lending by challenger banks rose by just 3% last year, the slowest annual growth rate since 2012/13.

BDO says that this slowdown in lending could be the result of the UK’s economic and Brexit-related uncertainty and also banks considering their risk appetites under current market conditions.

Leigh Treacy, Head of Financial Services Advisory at BDO, says: “Considering the huge challenges and costs of setting up a bank from scratch, challenger banks have done a great job. They have exceeded the expectations of many commentators, and delivered lending to borrowers who were hit hard by the credit crunch.

“However, Brexit uncertainty and the economic slowdown seems to be causing some of these banks to temporarily slow down their lending growth.”

Challenger banks have argued that that the benefits of their approach include:

  • Building brand new IT systems that are not reliant on using cumbersome legacy technology. This has reduced their IT maintenance spend, which may have helped them offer loans to customers at lower costs.
  • Not being affected by the mis-selling scandals that affected many of the UK’s high street banks. These scandals helped challenger banks build new brands free of the negative associations of issues like PPI and interest rate swaps.
  • Being free from the bureaucratic, limited and inflexible ‘tick-box’ processes used by major banks to making lending decisions. This has allowed them to lend more to borrowers who are good credits despite not meeting traditional banks’ criteria.

Leigh Treacy adds: “Challenger banks’ use of disruptive technology in digital banking services and improving customer service has helped them quickly acquire new customers. Some of the UK’s traditional banks have been slow to catch up.

“Many SMEs struggled to secure funding after the credit crunch as larger banks reduced their exposure to riskier loans. Individuals with near prime credit ratings also struggled to secure mortgages.

“However, challenger banks have stepped in over the last decade and proven to be a critical source of funding for many entrepreneurs. They have also supported many customers by offering easier access to mortgages to help finance home purchases.”

BDO adds that the importance of challenger banks maintaining strong stress testing policies has intensified as regulators step up their scrutiny of financial and regulatory reporting controls at these banks. The PRA has recently written to all CEOs at challenger banks urging them to maintain high standards of loan underwriting to reduce the impact of a potential market downturn.

Leigh Treacy adds: “The FCA and the PRA have made it clear that they expect fast growing firms to implement their recommendations immediately. Tightening underwriting controls could help them shield themselves from economic change.”

*Source: Analysis of 19 challenger banks’ balance sheets taken from their annual reports (year-end September 30)


Note to editors

Accountancy and business advisory firm BDO LLP provides integrated advice and solutions to help businesses navigate a changing world.

Our clients are Britain’s economic engine – ambitious, entrepreneurially-spirited and high-growth businesses that fuel the economy. 

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Jack Barnett
Mattison Public Relations on behalf of BDO LLP
[email protected]
020 7645 3636

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