Banks are failing SMEs, finds competition watchdog

By Carina Perkins contact

- Last updated on GMT

Related tags: Bank, Lloyds banking group

Lack of competition means banks are not incentivised to compete on price, service and innovation, the CMA found.
Lack of competition means banks are not incentivised to compete on price, service and innovation, the CMA found.
Banks are failing to provide the service and value that small and medium-sized (SME) businesses such as bars, restaurants and hotels need to thrive, according to a new report from the Competition and Markets Authority (CMA).

The study, published today alongside an investigation into consumer banking, concluded there is insufficient competition in the banking sector to provide SME’s with the high-quality, responsive and low cost banking services they require.

It stated the ‘big four’ high street banks – RBS, Barclays, Lloyds TSB and HSBC - are monopolising SME banking, accounting for over 85 per cent of Business Current Accounts (BCA) and 90 per cent of business loans.

Significant barriers to entry for smaller and newer banks, including the fact that 70 per cent of SMEs still believe that having a local branch is important, mean these larger banks have very little incentive to compete on price, service and innovation.

Service and satisfaction

While SME satisfaction levels with the big four banks were estimated at around 60 per cent, the study found that just 13 per cent of SMEs trust their bank to act in their big interest, and only 25 per cent feel supported by their bank.

“For service and satisfaction, although the evidence indicates that many SMEs are satisfied with the service they receive from their bank, this satisfaction is often passive and is low in relative terms. In addition, overall satisfaction tends to be slightly higher for the smaller banks than for the largest four banks,” said the study.

“We also note that greater concerns appear to arise in relation to relationship management services, an area which has been emphasised to us as of particular importance to many SMEs.”

The report concluded that competition in banking is ‘not sufficiently effective’ to drive the best possible outcomes for SMEs, and recommended a full competition inquiry into the sector.

“Our studies have found that despite some positive developments, significant competition concerns remain which mean that customers may not be getting consistently good service and value from their banks,” said CMA chief executive Alex Chisholm.

“Our provisional view is that a full market investigation by an independent, expert CMA group is necessary to look at this market in detail and identify appropriate measures if competition concerns are found.”

The CMA is now will now consult on its provisional decision to launch an inquiry, with views accepted until 17 September 2014.

Small business views

Commenting on study, Alexander Jackman, head of policy at the Forum of Private Business, welcomed the CMA’s decision to look into small business banking.

“We must ensure that the barriers to entry for new banks are reduced without compromising protection and will see what the appetite is from small businesses for an in-depth investigation into competition in the sector,” he said.

“Certainly more transparency is needed for easier comparison of products and more needs to be done to address the chronic decline in local branches.”

However, he added that banks were not the only issue when it came to small business financing.

“Increasingly, we are seeing larger companies use their supply chains to boost their own cash flow, a situation that is not acceptable and one that also merits investigation,” he said.

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