Traditionally the market for development finance has been dominated by major banks. With the likes of Barclays, HSBC, Lloyds Banking Group and Royal Bank of Scotland having a combined share of 85% of the development finance market, there was little appetite for developers to look elsewhere for funding.
However, in recent years the preference for tailored customer service and high customer satisfaction has increasingly become a deciding factor in the choice of development lender.
According to a study by the Competition and Markets Authority (CMA) and a survey of 12,000 small and medium sized developers conducted by the Financial Times, these small and medium sized developers are happier with the service they receive when they are clients of “challenger banks”/alternative lenders, rather than those that go to the major established lenders.
Increasingly, the highest ranked lenders are consistently alternative lenders, whereas the majority of the bigger banks scored a rating of below average with a satisfaction rating of around 60%.
At the top of their rankings were banks such as Handelsbanken, a Swedish lender with about 200 UK branches. Other rising alternative lenders to keep an eye out for are Aldermore, Masthaven, Close Brothers, Shawbrook and UTB.
These lenders have gained momentum in the short-term finance market not only by reducing their interest rates, but by redesigning the relationships between financer and developer. By offering a more bespoke service that is based more on partnerships with developers, more developers are seeing the added value that working closely with an alternative lender can provide.
Alternative lenders also benefit from a closer management structure which usually alludes larger banks simply because of their size. Closer management structures allow directors and senior managers to have a more hands-on involvement in the daily running of their banks. They are more in tune with what the developers really want from their finance packages and are able to pick up on subtle changes in their clients’ needs.
James Bloom, Managing Director of Masthaven Bank Development Finance, is equally optimistic about the rise of alternative lenders saying “it is reassuring that the latest surveys show clients are interested in switching to the challengers and are starting to recognise their virtues. The brokers and developers we work with recognise the value of a personalised, fast and competitive service in giving them the edge. One of the advantages of becoming a new challenger bank is that we can keep that at our core while being able to offer keener pricing and innovative product development.”
Over a quarter of the developers that took part in the CMA study said they would recommend their bank to other businesses. Additionally, one in 10 of the respondents said they would contemplate moving to another bank in the next six months. This means that the migration of developers from traditional banks to the challengers is poised to continue.
Perhaps the most interesting suggestion in the CMA report was the creation of an online comparison website for banks which would be built on the Business Banking Insight (BBI) and could change the face of the market in the near future.
