Why the challenger banks' share fell to 32%

In 2020 the challenger and specialist banks supplied just 32% of gross bank lending to smaller UK businesses, their lowest share on record. Read in isolation that looks like a retreat. It is the opposite. The fall is a one-year artefact of how the Covid loan schemes were delivered; strip it out and the structural picture is unchanged, with challengers already lending more than half of the market by 2018. For a borrower, the high-street bank is now one quote among many.

The British Business Bank’s Small Business Finance Markets 2021 report carries an arresting headline figure. After years in which challenger and specialist banks (every bank outside Barclays, HSBC, Lloyds, NatWest/RBS and Santander) had been taking an ever larger share of lending to smaller companies, 2020 saw that share fall back to 32%. On the face of it, the big-five clearing banks reclaimed the market in the year of the pandemic.

They did not. The number is real, but the cause is mechanical, and the chart below shows why a borrowing CFO should not read a single year of scheme-distorted data as a turning point.

The shape that matters is the run before 2020. On the Bank of England’s series, the challenger and specialist share climbed steadily from about 37% in 2014, when the big five still held nearly two-thirds of the market, to just over half by 2018, holding around there through 2019. That rise was structural: dozens of new banking licences, balance sheets built deliberately around the asset-backed, sector-specialist and event-driven credits the clearing banks found awkward. The 2020 drop is the only break in an otherwise one-directional decade, and it has a single, identifiable cause.

Why did the challenger share fall in the Covid year?

Because the denominator exploded. Gross bank lending to smaller businesses is normally around £57bn a year. In 2020 it reached a record £104.8bn, an 82% jump, almost all of it the government-guaranteed Bounce Back and CBILS facilities. Those schemes were accredited and drawn overwhelmingly through the big-five banks, who had the current-account relationships and the operational scale to push emergency money out of the door in weeks. Roughly £48bn of extra lending landed on one side of the ledger in a single year.

That is the whole of the explanation. The challenger share did not fall because challengers lent less or because borrowers preferred the high street; it fell because the big five booked an enormous, one-off, fully guaranteed slug of scheme lending that has no parallel in a normal year. As the schemes close and the 2020 vintage runs off, the arithmetic that produced 32% unwinds with it. The pre-Covid trend, challengers at or above half, is the one a CFO should plan around, not the pandemic dip.

What the crossover means when you are the borrower

The practical consequence is narrow and important. Outside the scheme year, more than half of all bank lending to smaller UK businesses already comes from outside the big five. And that is before the non-bank lenders and the growing pool of private credit are counted at all. The supply of credit has fragmented across dozens of lenders, each underwriting to its own box. The price of going to your one bank is no longer just the margin it quotes. It is whatever a better-fitted lender would have offered — more quantum, a looser covenant, a keener rate — that never reached the table because it was never asked for.

The clearing banks are not the losers of this story. On a clean, cash-generative credit they still price as keenly as anyone, and where the relationship bank is the right answer a competitive process will show it. What has changed is that the answer can no longer be assumed. The question is no longer whether your bank will lend, but who across the field will compete.