LAST month, the UK’s Competition and Markets Authority (CMA) issued its provisional findings from its investigation into the supply of retail banking services to personal current account customers and small and medium-sized enterprises.
The CMA found that a number of factors in each market combine to distort competition. In particular, low customer engagement and barriers to searching and switching together reduce banks’ incentives to compete on price and quality.
And the market for personal current accounts (PCAs) and SME banking (covering lending and the supply of business current accounts) represents big money: in 2014 PCAs and business current accounts (BCAs) generated revenues of approximately £8.7bn and £2.7bn respectively.
The SME market presents specific challenges: the strong product link between PCAs and BCAs – 51% of start-up SMEs open a BCA with their PCA provider, and 36% do so without searching at all – means that practices having an adverse effect on competition in one market affect the other.
Indeed, the nature of SME lending products, the difficulties of performing product comparisons and information asymmetries between the incumbent bank and other lenders (which enable the incumbent to price credit more accurately and make quicker lending decisions) mean that this will be a particularly difficult market to open up.
Both the personal and business markets were found to lack ‘triggers’ (such as a contract end date) that would otherwise prompt customers to consider switching. The CMA proposes that banks be required to prompt customers to consider changes to their banking arrangements at certain times – for example, by sending a message near the end of the SME’s free banking period detailing the likely charge for the coming year based on previous account usage.
One of the thorniest issues for the CMA to resolve will be who is responsible for the trigger message – as the CMA note, if this is left to the incumbent banks, then they may look to dilute the message’s purpose, but responsibility for every single communication would overwhelm any regulator. The question also arises: in a market rife with customer apathy, would one more banking communication really make a difference?
The CMA found that the complexity of BCAs and lending products means that product and provider comparison is too difficult. To remedy this, the CMA proposes extending the Midata government initiative – a voluntary projected intended to give consumers increasing access to their personal data in a portable, electronic format- to BCAs.
In addition, users of Midata currently download files containing transaction data from their online banking website and then upload it again onto price comparison websites , enabling a better comparison between PCAs. Extending this to businesses would enable SMEs to estimate the costs of alternative providers using their own transaction history. The CMA is also considering requiring providers to facilitate the establishment of a PCW dedicated to banking services for SMEs.
As a quick fix to aid comparison, the CMA proposes requiring loan providers to make a tool available on their websites permitting SMEs to enter the amount they wish to borrow and the term, together with certain other information. The provider would then use this tool to give an indication as to whether, and if so on what terms, it would be willing to make the loan. Given the SME’s complex financial needs, it is questionable whether a bank would be able to capture, through an automated online tool, all necessary information and then accurately determine the best product offering and pricing.
The CMA also proposes encouraging HM Treasury to use its powers under the Small Business Enterprise and Employment Act 2015 to require non-financial HMRC VAT registration data to be shared with credit references agencies. This would have the aim of increasing the accuracy of credit data held on SMEs, enabling providers to approve loans that might otherwise have been turned down on the basis of insufficient creditworthiness information.
If successfully implemented, the CMA’s proposals will result in greater customer engagement and a more fluid market. There will be a healthier link between product, service and price. The incumbent banks currently focus their efforts on larger SMEs; if smaller businesses begin to vote with their feet, relationship managers may be more incentivised to retain their business, resulting in greater bargaining power for SMEs. With more SMEs actively searching the market for finance, challenger banks will also have the opportunity to pitch for their business.
Indeed, the CMA believes that its proposals will create opportunities in the market – not just for challenger banks and FinTech firms using technology to increase consumer engagement, but also for intermediary businesses creating platforms to enable comparisons of products and then match-make applications and loan offers.
There is a definite business opportunity here. Think about which remedy would work best for your firm, and contribute to the CMA’s consultation. Consider whether your firm could take advantage of a gap in the market highlighted by the report, and develop your proposition accordingly. And, most importantly for now, use the consultation as a “trigger” to review your banking arrangements – should you be searching and switching?
Alix Prentice, partner in the financial services regulatory team of Taylor Wessing and Talia Carman, associate in the same team.