Retail Banking Set for Shake-Up

With the news that NatWest, RBS and HSBC could start charging small businesses for deposits if interest rates lurch into negative territory, one can hardly blame the UK’s SME community for feeling a little edgy. After Brexit threw the UK economy into another period of uncertainty, the last thing any business owner needs is an additional cost to contend with. Yet, with interest rates being slashed from 0.5% to 0.25% this week, there doesn’t appear to be much cause for optimism.

However, despite the worrying messages coming from some of the UK’s biggest high-street banks, the final report of the Competition and Markets Authority’s (CMA) retail banking market investigation could pave the way for small businesses to get a fairer deal from the country’s financial institutions. The report, Making banks work harder for you, reveals the shortage of competition that currently exists in the markets for personal current accounts and small-business banking services, and puts forward a range of recommendations on how the banking sector can be tipped in favour of customers.

“Essentially, the older and larger banks, which still account for the large majority of the retail banking market, do not have to work hard enough to win and retain customers and it is difficult for new and smaller providers to attract customers,” says the report. “These failings are having a pronounced effect on certain groups of customers, particularly overdraft users and smaller businesses. They also mean that the sector is still not as innovative or competitive as it needs to be.”

The older and larger banks do not have to work hard enough to win and retain customers.

Time for change

To address these concerns, the CMA is looking to implement a package of reforms that it believes will benefit personal and small business customers, and create a more competitive financial services sector. Chief among these measures is a requirement for all banks to implement what the CMA calls ‘open banking’ by 2018. It claims this will help accelerate technological change in the UK retail banking sector, primarily through the development and implementation of an open API standard for banking.

Ultimately, such a move will allow customers, including business owners, to share their data securely with other banks and third parties. This, in turn, should lead to the creation of new services that are tailored to the specific needs of customers. According to the report, these could include:

• A single app that allows customers to manage bank accounts held with several providers.
• The ability to move funds between current and deposit accounts to avoid overdraft charges or benefit from higher interest payments.
• Letting customers make safe, simple and reliable comparisons between the price and service quality of banking providers.
• Allowing a bank to monitor a current account and forecast a customer’s cash flow, which can help avoid overdraft charges.
• Giving other lenders access to a small business’s transaction history, which will allow them to assess its creditworthiness and offer better lending deals.

As part of the reforms, banks will also be required to publish objective and trustworthy information about the quality of their service online and in branches, so customers can compare them with their current bank. They will also be obliged to send out ‘prompts’ on the closure of a local bank branch or an increase in charges, as well as regular reminders to customers to review their current banking arrangements. Finally, banks will have to introduce a monthly maximum charge (MMC) on unarranged overdrafts and notify customers when they go overdrawn, something that many banks do already.

Encouraging customers to switch banks

The CMA revealed that only 3% of personal customers and 4% of business customers switch to a different bank every year, with 90% of business owners getting their business loans from their main bank. Meanwhile, over half of startups open their current account at the bank where the business owner has their personal account.

However, in its report, the CMA says personal customers could save an average of £92 per year by switching provider, while small business owners could see annual savings of around £80. In order to encourage people to switch accounts to other providers, the CMA will increase the number of services offered by the Current Account Switch Service (CASS) and run a promotional campaign to raise awareness of the programme.

Furthermore, in a move that could make it easier for SMES to secure business loans, customers will be able to ask current account providers for a copy of their transaction history after closing their account. It follows an initiative launched by the treasury in 2013 – and which is expected to be implemented soon – that aims to improve access to SME credit data for credit reference agencies, challenger banks and alternative finance providers.

The power of innovation

The CMA is also backing the launch of innovation charity NESTA’s ‘challenge prize’, which is encouraging the creation of innovative and commercially sustainable comparison services that will allow small businesses to compare the price, quality of service and lending criteria of a wide range of funding providers. Under the reforms, all banks that provide services to small businesses will be required to provide both financial backing and technical support to the NESTA project.

We are breaking down the barriers which have made it too easy for established banks to hold on to their customers. Alasdair Smith

Mike Cherry, national chairman of the Federation of Small Businesses (FSB), added: “Today’s banking market does not work well for small businesses. The CMA’s recommendations will help to create a more customer focussed retail banking market by tackling some of the challenges small firms face.”

It remains to be seen how big an impact these reforms will have but with many fintech startups already showing what can be achieved by applying a touch of tech to traditional banking, this could certainly end up being a successful shake-up for small businesses.