The Competition and Markets Authority (CMA) is giving the big banks until the Autumn to increase pressure on each other through competition to provide the best service to customers or face a full market investigation, which could ultimately lead to breaking banks up into more competitive units.

The CMA report said that the current low levels of account switching between banks by customers is not something that would be expected in well-functioning, competitive markets.

According to the CMA recommendation customers and small businesses are being failed by 'essential parts' of the banking sector.

"Having considered the evidence set out in the market study reports, the CMA has reached the provisional decision that an MIR (market investigation reference) should be made in relation both to PCAs (personal current accounts) and to retail banking for SMEs." said the report.

Craig Donaldson, Chief Executive, Metro Bank commented:

“We fully support the CMA’s announcement today and believe an investigation into the personal current account market and SME banking sector is indeed needed to create a level playing field, which in turn will create a competitive banking sector.

“As the first new high street bank in more than 100 years, we understand the challenges that new competitors face. While work has been done to improve this, we desperately need a level playing field that allows new entrants to come into the sector and win customers. Importantly, these new entrants should offer differentiated banking models that suit different customers’ needs; giving customers a choice is the key.

“The CMA report shows even less competition in the SME sector than in the personal current account market. We firmly believe that SMEs are the most underserved section of the market, and an investigation into how we can improve this is vital. Improving the treatment and choice in banking for SMEs will be beneficial to the whole economy.”

The ACCA said:

“The CMA’s decision to make a market investigation reference with regards to small business banking, at least, is not surprising. The industry’s own figures[1] suggest the SME business account segment of the market is twice as concentrated as the rest of the retail banking sector, and our reading of the SME Finance monitor Data is that SMEs have become increasingly tied into their main banks over the last two years, following a brief surge of competition in 2011.[2]

The City from across the Thames by Rob Farrow

By Rob Farrow

“The UK market is currently seeing an influx of challenger banks, with nearly 30 currently in the process of launching, and taking advantage of a new, more accommodating regulatory regime.[3] It’s fair to say that, until this new cohort of competitors is allowed to test the market and prove themselves, any findings on the competitiveness of the sector will be incomplete. Revived demand from SMEs for credit would also dramatically change the landscape in the meantime, making room for more competition.

“Then there is the bigger question of what outcomes we want out of greater competition, and what kind of banking sector would serve small businesses and the wider economy. The real issue is not how many competitors there are; even their market shares are not the end-all and be-all. What is important is what basis they compete on, and whose business they compete for. Without even a basic segmentation of the SME credit market to guide them, policymakers probably don’t have half the information they need at the moment.

“Thinking of the basis on which challengers compete – this is almost never price and certainly never easier lending. Rather, it is sector specialism, speed, and service. The main beneficiaries of this kind of competition will be relatively few prime business borrowers, and the benefits will be hard to quantify.

“We hope that the CMA will take considerable time to discuss business models alongside market share in its forthcoming review. What people sometimes forget is that most banking services are not actually profitable for banks. Mortgages, credit cards and premium current accounts subsidise pretty much everything else – they accounted for 70% of the UK retail banks’ revenue in 2011, and probably more today. This cross-subsidy is not unrelated to the perceived lack of competition.”

Charlotte Webster, Campaign Manager, Move Your Money said:

"We welcome the CMA's decision to investigate the banking market. We've been saying this for years. Simply, people want real alternatives. This is something the big banks would have you believe don't exist, but they do. Whilst millions have switched banks in the last year, there are many parallels between energy and banking. We should be seeing a switch from the big five to the big 500. In the meantime, the full range of banking providers can be found on our Ethical Banking Scorecard."

Paul Aitken, CEO and founder of SME lender Borro, said:

“If this is finally the key that will unlock the door for bank lending to fully meet the needs of the nation’s SMEs, then businesses across the country can not only breathe a sigh of relief, but also look forward to a brighter future where the battle for capital is no more.

“But, while the CMA’s initial recommendation suggests a full-scale inquiry into business lending in the banking sector, including the provision of current accounts, it has until the Autumn to make a final decision so there isn’t necessarily light at the end of the tunnel yet.  The clients that come to us in order to access finance through their personal assets for a business opportunity have said time and time again that despite having a stable business, the banks they thought they could rely on won’t even consider them for loans, let alone help with a much need cash injection to keep things going.

“Alternative lenders have become mainstream for those in need of finance to keep their business afloat, pay staff, and seize opportunities, and will continue to do so whether the banks change their ways or not.”

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