Banks aren’t working hard enough to compete for customers, with SME owners sticking to their personal current account supplier when searching for business loans, the Competition and Markets Authority (CMA) has found.
Lack of movement within the sector
The consumer watchdog has published its conditional findings of its long-term investigation into 12 banks and building societies that provide personal current accounts (PCA) and business current accounts for consumers and small businesses.
In its report, the CMA noted that nearly 60 per cent of consumers have been supplied with their PCA by the same bank for over ten years, with 37 per cent sticking it out for over 20 years with the same bank.
This lack of movement within the personal account market has been put down to an absence of information on new products and service quality from financial institutions.
Customers are further hampered by the severe lack of any price comparison tools, which makes it harder for them to find a better deal on their current accounts.
This has resulted in just three per cent of customers switching PCAs in 2014, with just 16 per cent of people browsing the market for a better deal. Work has been done to create more competition, with the Current Account Switch Service (CASS) launched in September 2013.
This lack of information from banks is keeping consumers from reaping economic rewards. Consumers that use a PCA with a large overdraft limit can save approximately £260 a year if they switched banks, with the average person saving £70 if they moved to another lender.
SME owners tend to stick with the same provider
Small business owners are suffering the same problem as consumers, with many sticking to the same current account provider when looking for a loan. When the initial free banking period comes to a close, 90 per cent of SME owners stay with their providers instead of going elsewhere.
Commenting on the report, Alasdair Smith, chairman of the retail banking investigation, has placed much of the blame on the banks, with financial institutions being able ‘‘to sit back and take their existing customers for granted.’’ Smith added that customers won’t benefit until more comparison tools are created to help customers and small businesses switch without any risk.
‘‘We are considering a series of measures that will have a far-reaching impact on how banks operate and will empower account-holders to search for and switch to the account that suits them,’’ said the chairman.
What is being done to change this?
The credit authority has made a number of recommendations to improve banking services for SMEs, including the creation of a price comparison site for small business owners.
Also high on the list of potential remedies was enabling banks to prompt business owners to review their account services during so-called ‘trigger points’ which occur in certain situations including a loss of service, closure of their local branch, unarranged overdraft charges or a change in the terms and conditions of their account. For SMEs the trigger points usually occur when their free banking period has ended.
Controversially, the CMA has decided not to recommend changes towards ending free if-in-credit (FIIC) accounts, with the investigation finding no evidence that FIIC affects competition. Tory MP Andrew Tyrie has slammed the CMA on the decision, branding free-if-in-credit accounts as a ‘con trick’.
‘‘It seems reasonable that millions of customers should be allowed to know how much they are being charged for having a bank accounts,’’ said Tyrie.
The Federation of Small Businesses (FSB) has welcomed the CMA’s interim findings, with national chairman stating that ‘‘A well-functioning banking market for small businesses is critically important to support UK economic growth.’’
However there are some SME lenders who feel the report doesn’t go far enough.
James Sherwin-Smith, CEO of lending platform Growth Street is concerned that there is no requirement for commercial finance products to carry an APR.
‘‘Without a standard price indicator, it is unclear how SMEs will be able to compare prices, even if the proposed remedies are adopted,’’ explained Sherwin-Smith.
‘‘This is badly needed to help simplify the complex charging structures employed by banks and others to charge SMEs more than they anticipate, and would result in a lower cost of SME finance and higher business and economic growth.’’