Banks are expected to be told to make it easier for small businesses to shop around for a better deal when the Competition and Markets Authority (CMA) releases its final report into retail banking tomorrow.
More than 90% of SMEs get their business loans from the bank where they have their current account, a figure which concerns the CMA.
The competition watchdog has said its proposed remedies, after a two-year investigation, could bring benefits of around £1 billion over five years to bank customers. Bank charges are complicated and opaque and many customers see switching banks as risky, according to the watchdog.
One of the suggestions made by the CMA to help small businesses is for a £5m prize for financial technology firms to come up with ways for SMEs to change accounts. The project, funded by the banks, will be overseen by the innovation charity Nesta and should come to fruition in the summer of 2018.
The watchdog has previously suggested banks should cap customers’ monthly unarranged overdraft costs. It found a wide range of fees, with some charging a daily fee of £5 to £10, some charging monthly fees and some also charging interest.
The CMA has also said new online comparison tools should be developed to help customers compare deals. It has said the prices and availability of loans to small and medium-sized businesses should be more transparent so the majority of SMEs need not turn directly to their existing bank for finance without considering going elsewhere.
Nic Beishon, Head of Commercial, Equifax UK & Ireland, is confident the CMA report will be good news for SMEs. He said: “The CMA’s retail banking market investigation has shown that many SMEs turn straight to their current account provider when they need a loan, rather than shop around for the best rate. By forcing the big banks to implement new lending tools, the CMA intends to simplify and speed up applications to encourage competition in the sector. While the new tools can be implemented without lengthy and costly internal IT changes, banks must act now to ensure SMEs can easily access the best finance deals within the six month window.
“The current state of play is costing SMEs time and money. In 2015, we estimate SMEs collectively spent nine and a half years applying for loans – almost one year of this was by customers who went on to be declined. The new tools will circumnavigate the full underwriting process to provide quick but reliable indications of eligibility for credit, as well as an indicative APR. The new tools will see laborious form filling cut from as long as an hour to a matter of minutes.
“The CMA is focusing on seven banks in the initial stages, but any bank serious about targeting SMEs, including the challengers, should introduce the same tools to ensure their offering remains attractive. Otherwise they run the risk that customers turn to the banks with the easiest application tools.”