Why we're still talking about access to finance

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2000, 2002, 2011 and 2013?

This could be a fiendishly difficult question from a favourite quiz programme amongst EEF bloggers - Only Connect - to which the answer is the years in which reports looking at the state of competition in SME banking were published. The next year in this particular series looks like it will be 2016 if the Competition and Markets Authority (CMA) proceeds with a phase 2 investigation of the sector.

CMA concerns about concentration of BCA market

Following the Vickers report (2011) and the Parliamentary Commission on Banking Standards (2013) the CMA conducted another market study of Banking Services to small and medium-sized businesses. The review looked at core banking services for SMEs - business current accounts (BCAs), overdrafts and loans - and set out a number of conditions that one might expect to see in a well-functioning market, including SMEs having a broad choice of provider, products and services are customer focused, good levels of innovation, and new players easily entering the market and growing their market share.

In over 180 pages of evidence and analysis, the report concludes that these characteristics are not evident in the UK SME banking sector. This should not come as a surprise as this was broadly the conclusion that others have reached over the past decade. Rather the picture has consistently been one of mediocre satisfaction levels with banks but low levels of switching; a paucity of new entrants into the market, those new challengers remaining rather small in scale and persistent barriers to these entrants from the cost to establishing a (still important) branch network and the costs associated with gaining access to the payments system.

Some facts and figures

The CMA bolsters its arguments with a host of, now widely recognised, facts about the UK SME banking sector:

  • 85% of BCAs are provided by the four largest banks in England and Wales. Concentration levels are higher in Scotland and Nothern Ireland.
  • 4% of SMEs switched provider last year - a lower proportion than those changing their energy or telecomms supplier.
  • Between 10%-20% of SMEs say the service from their bank is poor, but 70% don't see much difference from other providers in the market and comparing prices of BCAs and loans is complex.

Is it all bad?

These stats are not encouraging, particularly as there has been relatively little movement on any of these challenges in recent years. This also doesn't consider what's been happening to the supply of finance since the financial crisis (not a consideration for the CMA in this phase of its review process).

But some things have been moving. We've seen some divestments from the major banks to establish new players in the market, there are greater efforts within government to improve the sharing of credit information, which should provide challengers with more information on potential SMEs customers and the British Business Bank is getting up and running with a range of solutions to boost the presence of challengers and provide more financing alternatives outside of mainstream banks.

So what next?

The incremental steps to facilitate more new entrants and get more churn in the market are fine and welcome, but it could take decades to see a step change in some of the statistics outlined above. Back in 2011 EEF said a clear and actionable response from government to the Vickers recommendations should be an urgent priority. Given the small steps we have seen since, further action on this front feels no less urgent.

The CMA is now consulting on whether there should be an in-depth investigation into the markets for both personal and business current account and business loan markets and are inviting responses by 17th September (you can find more information here).

The evidence from the phase 1 investigation would seem to put the balance in favour of further work in this area, if that is what's needed to adopt actions that would accelerate progress towards a more dynamic sector for businesses - not just to offer more choice today, but to ensure the very diverse community of SMEs we have in the UK can access a range of competitively priced financing solutions to support growth in the long run. We also need to ensure that the sector can support these businesses through the ups and the downs of the economic cycle. And with those points in mind a next-phase investigation should perhaps consider pricing in more detail and the extent to which government-routed financial interventions have operated through existing providers in recent years.

Ultimately this has been a longer road than many had hoped in the aftermath of the financial crisis, but we must stay focused on the outcomes of delivering a more dynamic and diverse financing landscape for investment and growth across UK SMEs.

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Chief Economist

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