OFT review detects ‘competition concerns’ in SME banking

The Office of Fair Trading has expressed concerns about the level of competition found in the provision of business banking services to small to medium-sized enterprises.     In an update on its ongoing review of the sector, the OFT recognises that some improvements have already taken place, such as better sharing of credit dataRead More

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The Office of Fair Trading has expressed concerns about the level of competition found in the provision of business banking services to small to medium-sized enterprises.

 

 

In an update on its ongoing review of the sector, the OFT recognises that some improvements have already taken place, such as better sharing of credit data with new lenders, and changes to the authorisation regime that applies to new banks.

 

But this does not overcome the multiple concerns raised about the level of competition in the sector, and the potential for new providers to enter it:

 

  • Four banks account for 80% of the SME business current account market.
  • Lending to SMEs “is also concentrated”.
  • Most SMEs approach their current account provider first for lending, reducing competition.
  • Smaller lending providers face high costs and poor availability of data.
  • Smaller banking providers face challenges building a sufficient branch network.

 

On top of this, comparing products from different providers can be difficult, as they are often very specific and based on different aspects of an SME’s performance and needs.

 

The OFT again concedes that some SMEs “highly value” the existing relationship they have with their banking provider; however, it adds that shopping around and switching provider are both relatively limited in the sector.

 

“SMEs also perceive little benefit to switching business current accounts … because they often observe little to differentiate between the main providers in terms of price, terms or quality of service,” the OFT adds.

 

The OFT summarises its present findings as follows:

 

  • SME business banking is a concentrated market with stable market share.
  • Newcomers face barriers both to initial entry and to expansion.
  • Accountholders perceive barriers to switching.
  • Products cannot easily be compared on price, terms or service.
  • Low customer engagement leads to little ‘shopping around’ and low switching rates.

 

However, it seems the work in this area will not be completed until after the OFT’s responsibility transfers to the Competition and Markets Authority.

 

As such, the OFT has recommended that the CMA should complete the market study and decide on any action to be taken – something the CMA will do alongside its update on the OFT’s review of personal current accounts.

 

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