Digital challenger banks are turning heads in the business banking sector, proving that they are more than just consumer-friendly apps.

New banks with a digital-first, often digital-only, approach have emerged over the last decade as part of the financial technology (fintech) revolution that has seen businesses use the latest digital technologies, such as mobile apps and artificial intelligence, to deliver financial services.

These banks are user-friendly and not burdened with the high costs of operating a traditional bank. With no branches and a fraction of the workforces of traditional banks, made possible through technology, these banks are building customer bases.

However, they often seen as a second spending account, with customers doing most of their banking through a large traditional bank while using the digital bank for everyday spending. They are also seen traditionally as banks for the younger, tech-savvy generations.

This is changing, however, and has been highlighted by the latest small and medium-sized enterprise (SME) business banking customer satisfaction ranking from the Competition and Markets Authority (CMA). Using figures compiled by BVA BDRC, the CMA reported that digital challenger bank Starling came top in terms of customer satisfaction in three out of four categories in which it was ranked.

Starling topped the overall service quality ranking and was the most likely bank to be recommended to other SMEs by existing business customers. Handelsbanken was second and Metro Bank third, in the same category.

Starling also came first in the online and mobile banking category, with Barclays second and Metro Bank third, and was seen as the best business bank for overdraft and loan services, with Metro Bank second and Handelsbanken third.

Only Handelsbanken outranked Starling in terms of relationship/account management and in that category, which involved service levels in branch, Starling was not ranked because it has no branches.

App-based bank Starling, which reached unicorn status earlier this year, received its UK banking licence in 2015 as one of the new breed of tech-led challenger banks. In October 2020, it became the first UK challenger bank to make a profit when it announced a monthly profit of £800,000.

David Bannister, chief analyst at Bloor Research, is not surprised by Starling’s success in the business banking sector. “Starling being ranked top is really interesting,” he said. “Anne Boden, who set up Starling, came from a wholesale banking background, previously working for ABN Amro and RBS and she always said the aim was to move into business banking.”

Bannister said Starling is a bit of an exception because it always planned to move into business banking.

He added that things are changing and technology that was once only affordable for large traditional banks is now available to small challengers. “For example, the cost of systems for cash management facilities and foreign exchange stuff for international companies have just tumbled,” he said.

There are also many fintechs coming forward with services for businesses, typically small businesses initially, said Bannister. These include invoicing services and banking service integration with accounting systems.

Celent analyst Kieran Hines said Starling has focused quite heavily on the quality of its SME offering and is beginning to reap the rewards of that. “They’re not alone, though, and there is a growing sense of urgency about the need for established banks to strengthen their own offerings,” he added.

Hines said SME customers are challenging for banks to serve, because the needs of businesses will differ hugely depending on factors such as the sector, size and strategy of each one.

“Established banks have traditionally struggled to meet the specific requirements of this customer group, and banking services are only one portion of the range of different services and tools that a business requires to run,” he added. “In effect, this makes the SME segment a big opportunity for the providers that can get the model right.”

Hines said that over several years, the quality of the service offerings for SMEs from non-bank providers has continued to improve. “Quite a few of these are beginning to move towards offering services that encroach on the territory traditionally offered by banks,” he said. “Open banking has helped to accelerate this, but it was a trend that was already in motion.”

The Covid-19 pandemic has stretched businesses to their limits and the latest figures are a measure of how banks have supported their business and consumer customers, according to Adam Land, senior director at the CMA.

“The past year has put financial pressure on many people and small businesses, and this is the first full set of results to reflect how banks have supported customers through this difficult period,” he said. “If the service and quality offered by your bank has not been up to scratch, you may well be able to do better.”

Bloor’s Bannister said there were already high levels of dissatisfaction with business banking services, with some research showing that up to 90% of businesses are willing to change suppliers.

Using figures from Ipsos Mori, the CMA also reported that for overall service quality for personal banking, Starling was ranked third, with fellow challenger Monzo taking top spot and First Direct coming second. Barclays was ranked sixth, NatWest and HSBC were joint 10th, while TSB and RBS were 15th and 16th, respectively.