The past decade or so has brought about a sea change in how we manage our personal and business finances. Gone are the days when we’d be happy to take a fortnightly trip to the bank, check our balances, deposit a few cheques and maybe have a few new product offerings forced down our through. Remember when each deposit transaction finished with the cashier offering you a possible loan?
Technology and new entrants to the market have forced incumbents to buck acts up, and now you’re more likely to click on your banking app then ever meet someone in person to get something done. However, there are still some legacy hangovers to contend with and the CMA has produced a far-reaching report aimed at bringing everything up to speed.
It is still a pretty cumbersome and time-consuming process to switch accounts, and it’s probably fair to say that transparency on costs, changes and future plans is not exactly consistent. The CMA’s main conclusion is that banks aren’t having to work hard enough to retain customers, both personal and business, as the process of going elsewhere isn’t simple enough.
At the centre of the proposals is a requirement for banks to implement the Open Banking programme by 2018, allowing small and medium-sized businesses to share data securely with banks and third parties and then ultimately manage accounts with multiple providers through a single digital app. This could open the door for the likes of Amazon or Google to produce a finance management tool.
The plan is that no longer will customers have to move from bank to bank, and online platform to online platform, if one minute they are dealing with a mortgage and the next their business account. It’s also planned that a one-stop-shop service will make it easier for personal and business banking customers to compare the rates they are currently given with those of other providers.
The CMA wants customers to decide what is the best bank for them, and then feel like a change is possible. Right now, only three per cent of personal and four per cent of business customers switch banks in any year.
So what’s happening on a business front? The report makes it clear that the CMA does not believe business current accounts have enough “trigger points”. As these kind of arrangements are open-ended, customers don’t receive prompts like they might do in the case of an insurance policy renewal. To improve this, banks must now send out “prompts” indicating events such as branch closures or increases in charges, so that customers are fully aware of whether they are getting the best value or not.
Next in line is a change looking to alter a deep-rooted trend. The report concludes that over half of startup businesses open a current account at the bank where the business owner has their personal account. There is also a strong link between business current accounts and lending: some 90 per cent of small businesses get business loans from its main bank, with “little or no shopping around for other lenders”. Going forward, the CMA will improve the information available on loan prices and eligibility, require banks to adopt standardised business account opening information requirements, and possibly implement a soft search mechanism so that businesses can be confident in the ability to shop around for credit without adversely affecting credit ratings. “Small businesses,” it determined, “will be more empowered and less dependent on their existing bank.”
There are also plans afoot to use a small company’s transaction history to allow a potential lender other than its bank to “reliably assess the business’s creditworthiness” and offer better lending deals than it would without this information.
While the watchdog’s analysis declares that SMEs are underserved in today’s business banking landscape, there are some who are not happy with how far-reaching the changes have gone.
Rishi Khosla, co-founder and CEO of OakNorth Bank, believes the CMA’s report has “fallen short and failed to deliver” on a number key issues it identified, in particular those facing SMEs seeking larger loans.
“The CMA has explicitly stated in its report that a combination of factors make it difficult for new entrants and smaller banks such as OakNorth to effectively compete. Yet despite this, the solutions it’s provided for SME lending are limited to unsecured loans of up to £25,000, so won’t address the issues facing SMEs that need secured or larger loans.
“The fact that the CMA is simply going to pass the buck to the Treasury who won’t look to launch their own investigation until two years from now is extremely disappointing. There are millions of SMEs that are struggling to secure growth capital who may now need to wait up to four years for the situation to improve.”
This sentiment is echoed by Aldermore, a fellow challenger bank. Aldermore’s CEO, Philip Monks, welcomed the “positive impact” that the CMA’s remedies will have, particularly around transparency, but wanted more done with regards to capital requirements.
“The disadvantages faced by challenger banks in respect of disproportionate capital requirements relative to the largest banks remain a major issue for banking competition. This issue has been recognised repeatedly by the CMA and so it is very surprising that the organisation responsible for competition is not pushing for definitive action in this key area.
“In a post-Brexit world the effective provision of credit to smaller businesses will be essential to the economic competitiveness of the UK. In the last few years, it has been the challenger banks that have expanded their lending to this segment. We have been clear in our calls for the government to take a proportionate approach to the industry so that newer providers can continue to grow.”
Monks is not calling for “special treatment” for challenger banks, rather a one-size-fits-all approach.
The CMA, in analysing the changes made by the government with its bank levy, concluded that it does not believe these alterations (including a new corporation tax surcharge) are deterring entry or expansion or causing exit from retail banking.
In a statement, it said: “The bank tax regime continues to favour smaller banks including new entrants. However, the recent changes to the bank tax regime have reduced the previous tax advantage that new entrants and smaller banks had over those banks subject to the bank levy. Moreover, there are aspects of the design of the corporation tax surcharge that may lead to differential effects across retail banks and that might impact on competition between banks in the future. We therefore welcome HM Treasury’s (HMT) commitment to keeping the impact of the bank tax regime on smaller banks and new entrants under review.
“We decided that it would not be appropriate to undertake further analysis on this issue. We do not have powers to change the capital requirements regime and the regime as a whole is the subject of a number of significant developments for reform at international level.”
While we are no doubt on the cusp of a new horizon when it comes to technology and the way in which we handle business finances, it appears there is still progress to be made on the competition side. Challenger banks are calling out for onerous capital requirements to be lessened, so many can take a business-first approach to banking. Maybe then entrepreneurs and business owners will finally get the deal each have been calling out for – easier access to finance and a capital partner that adapts as they do.
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