Welsh SMEs Urged to Review Banking Options as Research Reveals Over-Reliance on Major Banks
New research from the Welsh Economy Research Unit at Cardiff Business School has highlighted that small and medium-sized enterprises (SMEs) in Wales should evaluate their banking relationships more regularly. The study, commissioned by Economic Intelligence Wales, examines how fintech affects SME access to credit and relationship banking across the nation.
Dominance of Major Banks and Long-Term Relationships
The survey conducted for this research reveals a striking concentration of banking relationships with the four largest UK clearing banks. Close to 85% of respondents reported these institutions as their main business bank. Furthermore, the data shows remarkable longevity in these partnerships.
- Over 50% of respondents have maintained relationships with their main bank for more than 20 years.
- An additional 30% have been with their primary bank for between 10 and 20 years.
The report acknowledges that long-standing associations can indicate strong firm-bank relationships that benefit the business. However, it also warns of potential "hold-up problems" where banks might retain customers by exploiting information advantages to increase switching costs. Regardless of the reason, the research suggests that SMEs may be missing valuable opportunities by not evaluating alternative providers.
Digital Transformation Post-Pandemic
The research documents significant shifts in banking interactions since the COVID-19 pandemic, with digital communication becoming increasingly prevalent.
- Prior to the pandemic, approximately 45% of respondents applied for loans face-to-face. This figure has now fallen to just 21%.
- Online loan applications with main business banks have surged from around 5% to 25%.
- SMEs and banks now engage more frequently through email, online chat, and video conferencing.
This digital shift has helped streamline processes and reduce communication barriers, particularly in areas where physical branch access has declined. The convenience and faster access to smaller loans offered by online applications have driven this change.
Continued Importance of Relationship Banking
Despite the rapid digital transformation, the research reinforces the ongoing significance of relationship banking for larger, more complex lending decisions. SMEs with stronger relationships with their business banks were more likely to receive expected loan amounts and reported higher satisfaction with the support received.
The survey revealed that very few Welsh SMEs use services from newer banks, peer-to-peer lenders, or crowdfunding platforms for external finance. The largest loan received by a responding SME since COVID-19 was £3 million, with a mean loan of approximately £421,000 and a median of £75,000.
Expert Perspectives on the Findings
Professor Max Munday of the Welsh Economy Research Unit at Cardiff Business School commented: "Our research highlights rapid changes since the COVID-19 pandemic, with technological trends set to continue at pace. Wales is experiencing a healthy evolution in SME finance and is well-positioned to benefit from a hybrid future—one that blends the efficiency of digital tools with the trust and insight that come from long-standing personal relationships."
Professor Munday emphasized that while digital tools are widening access and improving communication, strong relationship banking continues to underpin successful lending outcomes. He noted the importance of helping SMEs strengthen their digital capabilities, particularly as less digitally mature businesses in rural areas with fewer branches might struggle to engage with services.
Rhian Elston, Wales investment director at the Development Bank of Wales, added: "This research is an important reminder of the role that funders play in supporting business growth and productivity across Wales. At the Development Bank, we're investing heavily in digitalisation to enhance the customer journey and make it easier and faster for businesses to access the finance they need. But we also know that nothing replaces the value of personal relationships."
Recommendations for Welsh SMEs
The report suggests that business advice interventions in Wales should, at minimum, signal the value of periodically reviewing main business banks and exploring the financial services market. Finance providers are encouraged to maintain both digital and relationship-based application routes to best support SME needs.
Economic Intelligence Wales, which commissioned the research, represents a collaboration between the Development Bank of Wales, Cardiff Business School, Bangor Business School, the Enterprise Research Centre, and the Office for National Statistics.
