Lending by UK challenger banks has doubled in the last five years to reach a record of £115 billion.

Data from accountancy firm BDO suggested that a wave of challenger banks, such as OakNorth and Starling, have filled the gap left in the market after the credit crunch, particularly targeting under-served market segments like small businesses.

However, whilst digital challengers have doubled their lending, with the amount lent increasing in each of the last seven years, some challenger banks have reduced their risk appetites and slowed the growth of their loan books. For instance, lending by challenger banks rose by three per cent last year – the slowest annual growth rate since 2012/13.

The BDO analysis stated that this slowdown in lending could be the result of the UK’s economic and Brexit-related uncertainty, as well as banks considering their risk appetites under current market conditions.

The Prudential Regulation Authority recently wrote to chief executives at challenger banks urging them to maintain high standards of loan underwriting to reduce the impact of a potential market downturn.

Challenger banks have argued that that the benefits of their approach include: building brand new IT systems that are not reliant on legacy technology, and not being affected by the mis-selling scandals to hit many of the UK’s high street banks.

Leigh Treacy, head of financial services advisory at BDO, said: “Considering the huge challenges and costs of setting up a bank from scratch, challenger banks have done a great job – they have exceeded the expectations of many commentators and delivered lending to borrowers who were hit hard by the credit crunch.

“However, Brexit uncertainty and the economic slowdown seems to be causing some of these banks to temporarily slow down their lending growth.”

She concluded: “Challenger banks have stepped in over the last decade and proven to be a critical source of funding for many entrepreneurs, they have also supported many customers by offering easier access to mortgages to help finance home purchases.”

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