Transparency of information is a central remedy to help SMEs get the best deal from their bank, according to a landmark report on the future of the UK banking market. The Competition and Markets Authority (CMA) has issued its review of the state of the UK banking market, and has made wide-ranging recommendations. The report recommends the switching process be made easier to encourage competition among banks.
Concentration in the SME banking market is too high, it found. “The combined market shares of active business current accounts (BCAs) of the four largest providers in GB (RBSG, LBG, Barclays and HSBCG) and in NI (RBSG, Danske, BoI and AIB) were 83% and 86% respectively.” Despite the recent emergence of so-called ‘challenger banks’, the big four banks’ share of the business lending market had only dropped by 1% in 2015.
Comparing prices is a thankless task, the report found. They are complex and vary significantly between SMEs depending on usage, whether the SME is able to negotiate fees, whether it benefits from so- called ‘free’ core transactions and whether it pays a per-transaction or a monthly fee.
That issue is especially important given the huge variation in the price of business current accounts. The CMA report found that the difference between the highest and lowest monthly costs was over 100% for the majority of the customer profiles.
For five of the profiles, the highest monthly cost was over three times as large as the lowest monthly cost.
‘Smaller banks performing well but yet to break through’
Tellingly, customer satisfaction with challenger banks is higher than the longer established banks, and said researchers observed that some banks appearing to offer above-average pricing and below-average quality are gaining market share; and, conversely, banks appearing to offer below-average prices and above-average quality are either losing market share or are gaining market share at a slow pace.
‘Not enough innovation from banks’
The critical issue of banking innovation – of coming up with new, more helpful products and services for customers - is addressed, and UK banks are found sadly lacking, particularly when compared to services offered to personal customers. The report says it found ‘Little product innovation and innovation has tended to focus on the digitalisation of banking and reducing customer reliance on branches. These innovations have lagged behind the levels observed for PCAs. For example, some banks do not offer mobile banking to SMEs and/or offer less functionality than they offer to PCA customers.’
All of this may go some way to explaining the low levels of engagement among SMEs with their banking providers. Most SME owners ended up using the same bank for their business as they had for personal accounts, while over half didn’t compare providers, and even a quarter only did so in a superficial way.
‘SMEs not engaged enough in the banking market’
The report also finds inertia among small businesses, which may contribute to SMEs paying more than necessary for their account.
“There is a lack of triggers that would prompt them to consider their BCA, and BCAs are relatively low cost compared with other costs of business. SMEs perceive that remaining loyal to a bank will be beneficial, in particular in relation to future lending decisions. There is also a perception among SMEs that potential gains from switching are not high and that there is limited differentiation between banks.
“This perception is not borne out by our BCA pricing analysis which found significant differences between the highest and lowest monthly costs of a BCA for almost all our customer profiles. Whilst our estimates should be interpreted carefully, our BCA pricing analysis suggests that, in GB, SMEs could save around £80 per year on average by switching to the bank that was cheapest based on their transaction behaviour. ”
Overall, the market for small business banking is described as lacking in competition and transparency. Neither banks nor their customers are spending enough time developing better relationships to benefit both, and the constraints on switching are leading to a slow moving and inefficient market situation. As a result, challenger banks are not having the impact many had hoped. High barriers to entry and customer reluctance to switch are mainly responsible.
‘Technology central to improving information and competition’
So what of the remedies? The CMA says there are three areas that can help to promote customer engagement and help customers make reliable and easy comparisons between banks based on their products’ prices and features, quality of service and customers’ own transaction history.
The CMA says banks should follow the lead of digital pioneers such as Facebook and Google in developing API standards, which “In banking, can be used to share, in a secure environment, information such as the location of bank branches, prices and terms of banking products. APIs may also be used, with the customer’s informed consent, to share securely their transaction history to enable access to tailored current account comparisons and other services.
Essentially by adopting an ‘open banking’ model, UK banks will in future have to provide clarity of pricing, comparison of services and access to data. “This will enable intermediaries to access information about bank services, prices and service quality. Customers who are satisfied about privacy and security safeguards, and are willing to give consent, will be able to share their own transaction data with trusted intermediaries, which can then offer advice tailored to the individual customer. This will make it easier for customers to identify the best products for their needs.”
‘Reforms to take effect by 2018’
As far as a timetable for this package of reforms, the report says the CMA expects that all aspects of an open banking standard for sharing transaction data would be up and running by early 2018 at the latest.
An additional measure will force banks to end the open ended nature of customer relationships, and will require them to send reminders to customers to refresh their services and perhaps shop around for other providers. “Some prompts,” the report says, “Might be triggered by specific events affecting the customer such as the closure of a local branch; others might be periodic, such as a reminder included in an annual statement.”
On the issue of improving SMEs’ understanding of the services on offer, the CMA has asked Nesta to organize a challenge prize to come up with ways of developing a ‘one stop shop’ solution, akin to a price comparison website, to help SMEs decide on what bank to use.
“We consider that this offers the best prospect of effectively addressing this problem, as it is most likely to facilitate innovative and commercially sustainable solutions and should encourage new suppliers to enter the market without precluding an ongoing role for existing providers of comparison services.”
‘Loan pricing to be simplified’
In a further move to open up the access to clear information, particularly on price, the CMA will require “all lenders offering loans publish standard rates for unsecured loans and overdrafts of up to £25,000 in value and that this information is made available as open data to intermediaries. Further, we are requiring the largest SME lenders9 to offer a tool on their websites so that business customers can get an indicative quote and know, provisionally, whether they would be eligible for the loan or overdraft they seek.”
‘Businesses must do their bit to improve market’
Ultimately, however, the CMA admits that their remedies will only have the necessary impact if SMEs themselves engage more with their banks. “The overall package of remedies for SME banking will be more effective if more businesses understand the benefits of shopping around for their banking services,” the report says. “Professional advisers, particularly accountants, have an important role in helping SMEs make good business decisions, including decisions about their choice of provider. We are therefore recommending that BEIS works with the BBB and professional associations to explore ways in which their members can channel advice on choice of banks and sources of finance to SMEs.
“Professional advisers, particularly accountants, have an important role in helping SMEs make good business decisions, including decisions about their choice of provider. We are therefore recommending that BEIS works with the BBB and professional associations to explore ways in which their members can channel advice on choice of banks and sources of finance to SMEs.