Why the CMA’s banking investigation has let SMEs down

The CMA report
The CMA report

On Tuesday, the Competition and Market Authority’s (CMA) published the final report on its retail banking investigation into the supply of personal current accounts and the banking services provided to small and medium-sized enterprises (SMEs).

The investigation was initially launched in November 2014 following concerns the CMA had around the effectiveness of competition in these sectors. The investigation set out to address: the low levels of customers shopping around and switching, the limited transparency and difficulties for customers in making comparisons between banks, the continuing barriers to entry and expansion into the sector for new and small banks, and the market dominance of the big four.

It had the potential to lay bare the issues facing SMEs seeking growth capital and provide clear recommendations as to how to tackle them. Unfortunately, the report that appeared on Tuesday morning proved to be a disappointment to SMEs seeking larger loans and failed to deliver solutions to a number of the key issues it identified.

In its report, the CMA noted that a combination of factors make it difficult for new entrants and smaller banks such as OakNorth to effectively compete. These include the high cost of customer acquisition including product linkages and, in relation to SME lending, the informational advantages held by business current account providers - of which the big four represent 83 per cent of the market. In addition to this, incumbent banks are able to spread their costs over an established customer base and have lower costs of funds for lending.

To tackle this issue, the CMA recommended that a price comparison website be created, enabling SMEs to compare the prices of different loan products and choose a provider accordingly. There are two key problems with this “solution”: the first is that it is trying to resolve adverse pricing in a market where the fundamental problem is lack of supply. If you push down prices in a supply-constrained market, you will have even less supply therefore worsening the situation. The second is that as the CMA pointed out, it will only be helpful to SMEs seeking unsecured loans and overdrafts up to £25,000. This is because larger loans typically require a much more bespoke approach with specific credit assessments and individually tailored terms.

Yet instead of trying to come up with a solution to make it easier for banks such as OakNorth – which has been launched specifically to help businesses seeking larger loans – to compete, the CMA is simply going to pass the buck to the Treasury who won’t look to launch their own investigation until August 2018. In the meantime, the CMA is hoping that by encouraging consumers to shop around and switch personal current account providers (of which the big four represent 70 per cent of market share), they’ll be more inclined to look outside the big four when seeking a business current account or business loan. This is something that at best will have a marginal impact.

The CMA should work with the Treasury and the regulators (the Prudential Regulation Authority and the Financial Conduct Authority) to create a more favourable regulatory environment for new entrants such as OakNorth. Unlike large banks, we do not pose a systemic risk so should not have to adhere to the same capital and regulatory requirements as them. Otherwise, I’m afraid in four years’ time when we’re looking at the outcome of the Treasury’s investigation, we’ll be in the exact same position as we are now.