It’s always been difficult for "challenger banks" to compete with the U.K.’s largest players. In the past, numerous upstarts – often called challenger banks - have failed to move the needle in either retail or corporate banking. Their development stalls at the early stages because they are not able to offer customers a compelling alternative.

However, a new generation of challengers has recently entered the market. Since the financial crisis of 2008, the image of the big banks has taken a sustained beating in the court of public opinion. Meanwhile, the Competition and Markets Authority is looking at measures to make it easier for consumers to switch products. The resulting market and regulatory conditions have created a promising environment in which challengers can thrive.

Yet the basic problem for challengers and investors still remains: how to lure customers away from big banks and achieve attractive returns doing so?

In this Executive Insights, L.E.K. Consulting's Diogo Silva and Peter Ward present a solution by delivering a strategy that targets U.K. small and medium sized enterprises (SMEs) – a market whose needs are largely unmet by the largest banks.

To take full advantage of the SME opportunity, challengers need to target specific segments and offer a differentiated proposition. This strategy requires a deep understanding of the needs of SMEs in select industries and at different phases of development. Moreover, it requires a different perspective on customers and products. Challengers that do this can create sustainable businesses capable of generating attractive returns on capital for their investors.

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