The rise of the Challenger Banks – a perspective from United Trust Bank

By Alan Margolis – Head of Bridging, United Trust Bank

One of the commercial buzz phrases of the moment is “Challenger Banks”. It is used to define or categorise those banks which in some way challenge the dominance of the big High Street players such as HSBC, Barclays, Lloyds and RBS.

Commentaries on challenger banks are usually written from the perspective of market commentators and experts. However, in this article I aim to offer Business Moneyfacts readers a different perspective: one from inside one of the challengers.

Large banks, like other large organisations and commercial undertakings, have certain advantages by virtue of their sheer size. The obvious include economies of scale, the ability to have broad high street presence and a potentially diversified and large balance sheet permitting interbank and money market borrowing at the lowest levels, to name but a few.

However, the plight of Britain’s biggest banks following the ‘Credit Crunch’,  graphically illustrated the downside that can come with sheer size and scale, as well of course failures including the part nationalisation of RBS and Lloyds as well the failure of Northern Rock. We are now into the post Credit Crunch era and hopefully British economic recovery, and it is now that we are seeing challenger banks becoming increasingly important as part of the financial landscape.

One aspect which I believe became clear from the wash of the Credit Crunch is the advantages that specialist banks such as United Trust Bank can have over their larger brethren. This includes a tighter management structure where senior management are more closely attuned to the equivalent of the Bank’s shop floor. For example in our case, the directors and most senior management attend Credit Committees where they join discussions and approve or reject proposals for bridging loans, asset finance and property development loans. There is also a focus on a more limited but more tailored product range and perhaps most distinctively, an ability to provide a more personalised service to customers.

Our three lending divisions, Asset Finance, Short Term Secured Lending (Bridging) and Development Finance are all well suited to traditional relationship lending. For instance, our Asset Finance is secured primarily against wheeled and tracked assets and is conducted exclusively through a select broker panel. The relationship between bank and broker is absolutely key, enabling the Bank to quickly gain a true understanding of the borrower’s business and hence credit risk, both of which are fundamental to this type of lending. Although loan sizes are typically lower than for development and short term lending, volumes are greater yet, each application still receives the required individual attention of senior personnel who will endeavour to formulate a bespoke solution.

In contrast, introduced by professional intermediaries, Development Finance ultimately involves dealing over a significant period of time directly with the borrower. This starts with the first meetings with the customer, usually at the development site, during the application stage, and, if successful, continues with regular visits during the construction process to completion. Development lending in particular relies on the lending experience of the Bank’s representatives, in our case this is Noel Meredith and his team of Property Development Directors. Between them they’ve spent several decades financing developments up and down the country and most days at least one of the team will be on a site meeting existing and potential new borrowers complete with a hard hat and high visibility jacket. Lender/borrower relationships can also span decades with developers often coming back to the same lender time after time.

Equally distinct is my own short term secured lending department providing facilities commonly known as Bridging Finance. Similar to other divisions our business is broker introduced and our loans are bespoke.  Although commonly thought of as a facility to use between the purchase and sale of a property, the uses for bridging finance are wide ranging, from the traditional bridge to complex loans involving mixed property portfolios as security and ownership structures; these can range from the personal to onshore and offshore companies as well as trusts. Such are the varieties of the background “stories” to our customers loans that we meet many of them face to face in order to better understand their situation and assist in avoiding problems later on – this is particularly important for those loans where time is a critical factor.

These three types of lending are examples where smaller challenger specialist banks can provide specific products that are not necessarily suited to the larger High Street Lenders,  as they require a level of professional interaction with financial advisors and / or customers.

Although High Street banks form an essential part of our economic fabric, offering services the majority of the population require such as current accounts and mainstream mortgages. They have received a great deal of criticism. Witness the contradictory pressures to lend more, yet set aside more capital for regulatory purpose, or the cheap headlines available to politicians by bank and banker bashing.  However the seismic changes in the financial market that followed the credit crunch have allowed the specialist banks to emerge and flourish as they find their niches and demonstrate one of the positive aspects of the free market. The ability of businesses to fill voids vacated by others and meet a demand where one exists, in this case for bespoke finance requiring a personal touch and where relationships are at the centre of the business.