Small businesses need more competitive banks

I was recently invited along with a number of other small business owners to the Office of Fair Trading, which is writing a report on competition in the banking sector. The OFT wanted to consult with smaller firms about the banks. 

Had we seen their behaviour change since the crisis of 2008? Were they providing the small business sector with the service they needed?

This is not the first time there has been an investigation into competition in the banking sector. Back in 2000, the Cruickshank report identified a lack of it, and the truth is there has been little progress since then. The way the UK banking industry is structured impacts on the ability of small and medium firms to get the very best service compared with their international competitors. That is of great concern.

The financial crisis and the subsequent banking scandals have demonstrated that we are a long way from an effective system. The old problems that work against a competitive environment remain, such as the inability for businesses to switch bank accounts quickly and easily.

There is a generally held belief among businesses owners that there is little difference between any one of the big five banks with their intensely risk averse, follow-the-herd mentality. It is a situation that could present a market opportunity for new banks. Businesses may be unwilling to switch between banks that are regarded as “all the same” but if they were offered a new model, it could be a different story.

There are signs of hope with consensus in the business community that some of the new challenger banks are offering a better service.

So what kind of banking industry do businesses need?

For a start, let’s have more banking licences granted, which will require deregulation, to create more specialist and regional banks. New Internet banks using innovative technology could introduce competition to banking in the way that new tech companies have in other industries. We need to break up the old clearing system where power is concentrated to keep the incumbents on their toes.

The new Financial Conduct Authority and the Office of Fair Trading should set up a specialist unit that promotes banking competition, constructing a framework that is continuously scrutinised. If the incumbents delay in implementing change as they did with “fast pay” they should be sanctioned.

The incumbent banks present a powerful lobby that has inertia as its mantra. Small businesses are demanding change. If the government truly wants to make the UK economy more dynamic, it should start here.

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