FCA: on SME Banking Market Study 

The FCA has announced that it has been working closely with the Office of Fair Trading (OFT) on the SME banking market study.

The OFT has issued a market study update, which sets out a summary of the analysis to date and how the transfer of responsibilities to the CMA will affect the timing of this market study. The OFT’s update is summarised below, with reference to all issues covered in the study, whether or not they relate to activities regulated by the FCA.

During the course of the SME banking review the FCA and the OFT have held a wide range of meetings with industry stakeholders and representative groups of SMEs. SME roundtables and focus groups have also been held across the UK.

The analysis to date, which is still ongoing, suggests that competition concerns may remain in this market:

The supply of business current accounts (BCAs) and lending to SMEs is concentrated, with market shares remaining stable over time.
Significant barriers to entry and expansion have apparently contributed to smaller providers finding it difficult to enter and expand their business, across the core business banking products, such as BCAs and general purpose business loans, including:
access to key information, particularly information on the creditworthiness of prospective borrowers needed to make effective lending decisions
the high cost of accessing payment systems, which are necessary for a provider wishing to operate BCAs
the cost of expansion arising from developing and running IT systems
the need for a broad branch network given the preference of many SMEs for using branches for core business banking services
certain aspects of bank conduct which appear to hinder SME customers from accessing finance from alternative providers. These include concerns that there are often significant delays in banks waiving security in respect of existing loan arrangements or agreeing the documentation needed for an alternative lender to take a second charge, and
aspects of SME behaviour, including the tendency of many SMEs to make their initial choice of BCA provider on the basis of which bank supplies their personal current account or the proximity of a local branch, and low levels of switching which limit newer and smaller providers’ ability to acquire customers.
The scale of new entry remains very limited, with smaller providers typically focused on servicing particular niches (e.g. certain types of lending such as asset finance) or particular types of SMEs.
The ability of SMEs to shop around to obtain a BCA or loan on the best terms is restricted by difficulties in comparing the offerings of different providers on both price and quality of service due to limited transparency of relevant information.
SMEs generally exhibit a significant degree of inertia and low levels of engagement with their banking provider(s). SMEs observe little differentiation between the main providers in terms of either price or quality of service and continue to perceive little benefit in switching.
Despite finance from sources such as peer-to-peer lending, venture capital and equity finance being available, SMEs demonstrate low awareness of the existence of alternative finance providers.

The FCA will continue to work closely with the CMA through to conclusion of the SME banking market study, which is expected to be published during Summer 2014.

 

For full press release visit the FCA website

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