CMA: Ensure more competition for small business banking

Monday 26 October 2015

The Competition and Markets Authority (CMA) has published the provisional report into the state of the current account and business banking sectors in the UK, which are worth around £16 billion.

It has drawn attention to what it claims is a low level of switching providers in both consumer and small to medium-sized enterprise (SME) accounts, suggesting that there is not enough competition between banks.

This can lead to smaller banks offering more favourable arrangements being unable to establish a foothold in the financial marketplace, while there is little incentive for larger organisations to offer the best rates to attract customers.

Interestingly, when a SME needed to set up a bank account, over 50 per cent of companies chose to do business with the same bank that the decision-maker or owner already used to handle their personal finances, and then go on to use the same provider for other services such as commercial loans in 90 per cent of cases.

The CMA also pointed out that bank charges could be “complex and difficult to compare”, particularly for smaller businesses and those who were just starting out as entrepreneurs or in self-employment.

Talking to a specialist accountant can help to clear up some of the confusion, as well as offering an objective comparison of what each provider is offering.

However, the report was not all negative. The CMA singled out the growth of alternative finance companies and online banking (particularly in the case of smaller banks) as areas where significant progress has been made.

Alasdair Smith, chair of the retail banking investigation, said: “Banking is a sector of huge importance that affects every household and business in the country. We think customers need to be put in charge of their banking.

“There have been long-standing concerns about the retail banking market, where many customers could save money and get better services by switching accounts. This investigation was an opportunity to take a detailed and independent look at the sector.”

He added: “We don’t think that customers will truly benefit from a more competitive marketplace until they can compare accounts more easily and feel confident that they can switch without risk, and that is why our provisional remedies are aimed at giving customers control.”
The preliminary report also had some concrete suggestions for how the government could improve the existing situation. This includes updating Midata, a government-backed website that allows customers to view their banking history, and then easily submit the information to a price comparison service which is able to offer them a personalised recommendation for a new bank account.

A dedicated website to help SMEs weigh up their banking options was also suggested, as there is currently no effective service for this demographic.

One thing that the CMA did not recommend was the breaking-up of the largest banks so as to promote competition, as has been done with Lloyds and TSB (formerly Lloyds TSB) in the wake of the financial crisis. This is because it felt that such a move would not help to address the underlying problems behind a lack of switching.

By Victoria McDonnell

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