The Competition & Markets Authority (CMA) is conducting an investigation into the supply of banking services to small and medium-sized enterprises (SMEs). The CMA published their provisional findings recently.
A look at their research to date sheds light on how poorly served SMEs are by the high street banks, and the CMA has suggested several possible remedies to increase competition. While the watchdog deliberates, the CMA research suggests that businesses should shop around more and try to negotiate with banks to get the best deal, and keep an open mind to alternative, innovative providers that can offer better service and value.
SME are poorly served and yet don’t switch
The CMA found that the largest four banking groups in the UK account for over 80% of the business current account (BCA) market. This is undoubtedly a highly concentrated market, yet the CMA has resisted calls for a break-up of the high street banks market share.
Less competition has a significant impact on service quality; some banks do not offer mobile banking to SMEs and/or offer less functionality than they offer to personal current account (PCA) customers.
No surprise then that the CMA also reported that the proportion of customers who would warn others away from their bank exceeds the number that would recommend their bank.
And yet only 4% of SMEs in Great Britain had switched BCA provider in the last year and only 2.6% of SMEs in Northern Ireland.
Worse still – 35% of SMEs dissatisfied with their bank did not even consider switching according to the CMA. The principal reason given was access to finance – SMEs are concerned that any history, knowledge and relationship they have built with their bank will be lost in the transition. In turn, banks are diverting SMEs from flexible, cash-flow enabling solutions such as business overdrafts, to complex and expensive alternatives such as factoring. There has been an almost 50% fall in the number of business overdrafts available to SMEs in the last three years.
Possible remedies – what’s in store?
While the CMA included a possible remedy to make it easier for current account customers to find out whether a new provider would provide an overdraft – SMEs are not included in the scope of this proposal.
There are however, three positive changes proposed by the CMA that business owners should take note of:
Mandatory nudging to encourage switching – “Requiring banks to prompt customers to review the service they receive from their bank through receiving individual messages at certain ‘trigger points’. These trigger points could include a loss of service, closure of their local branch, unarranged overdraft charges or a change in the terms and conditions of their account. In the case of SMEs a key trigger point could come at the end of free banking periods.”
A price comparison website for SMEs – a great idea in theory, but in practice how will businesses be able to compare prices when the SME banking charges are complex and opaque? This part of the banking sector hasn’t learnt from the mistakes of the past and continues to use “teaser” headline rates to attract customers while burying punitive and costly fees in the fine print of terms and conditions. This is because business lending is still a largely unregulated activity falling outside the scope of the Financial Conduct Authority, and thus lacks simple customer protections, such as the need for SME finance promotions to carry an APR.
Opening up of SME bank data – the CMA call for better sharing of information with credit reference agencies, banks and financial advisers – “making it easier for SMEs to shop around for loans and cutting out the need for multiple application form filling.” They have also suggested that the consumer focused Midata initiative is extended to business customers, which would allow businesses to extract their account history and share with price comparison websites and others to help get them the best deal. Again a great idea in practice, but with limited adoption of Midata in the consumer market, it’s unclear whether this will have much of an effect.
Businesses need to shop around more
The CMA research found that more than 50% of start-ups looking for a current account for their business choose the bank with which they have a personal current account; over 90% stay with their business current account when the initial free banking period comes to an end, and around 90% then go to their BCA provider when they are looking for credit.
Furthermore the CMA analysis of the BCA pricing structures for the set of SME customer profiles used showed substantial variations in BCA monthly charges between banks. Therefore, in theory, businesses could save by comparing tariffs and moving to a cheaper provider given their particular needs. Businesses should also consider non-bank alternatives – banks are not the only solution for loans and business overdrafts.
By James Sherwin-Smith, CEO, Growth Street