Joint FCA/CMA SME banking market study

The Financial Conduct Authority (FCA) and the Competition and Markets Authority (CMA) have published a joint market study on banking services for small and medium-sized businesses. The findings of the market study were arrived at by both authorities, which pooled resources and expertise in their first collaborative project.

SME banking market study

Why SME Banking?

There are over 4.5 million small and medium-sized enterprises (SMEs) in the UK, accounting for some 60% of private sector employment and almost half of the total turnover of private sector businesses.  Effective competition to provide SMEs with high-quality and responsive banking services is critical to ensuring that SMEs are able to get what they need from their banks.

What was the scope of the study?

We focused on the supply of core banking services to SMEs, namely:

  • business current accounts (BCAs) and overdrafts
  • business loans (both secured and unsecured term loans but not including commercial mortgages)

We considered how competition was working in England and Wales, Scotland and Northern Ireland.  We looked at the nature and effectiveness of competition in SME banking markets, SMEs’ willingness to shop around, the level of switching and transparency including SMEs’ ability to make effective comparisons across providers and informed decisions about products that best meet their needs.

What did we do?

We consulted widely with stakeholders including the UK’s largest banks, smaller banks and alternative finance providers, SMEs and their representatives, firms providing services to the SME banking sector (e.g. IT providers) as well as other public and governmental authorities.

What did we find?

Whilst there have been some positive recent developments, the FCA and CMA found that competition is not effectively serving the interests of SMEs:  In particular:

  • the markets remain concentrated with the largest four providers accounting for over 85% of BCAs and 90% of business loans
  • barriers to entry and expansion for newer and smaller banks remain significant including the need for a branch network
  • there is very little movement in the market shares of the largest banks (other than as a result of mergers and acquisitions) and there has only been one new entrant into full service SME banking in recent years
  • many customers see little difference between the largest banks in terms of the services they offer
  • levels of shopping around and switching between banks remain low.  Only 4% of SMEs switch bank each year.  Perhaps as a result, very limited market share gains have been made in recent years by those banks with the highest levels of customer satisfaction (not what would normally be expected in well-functioning competitive markets)

CMA’s decision to refer the markets for SME banking and personal current accounts

In July 2014 the CMA provisionally decided to refer both SME banking and personal current account markets for in-depth investigation. The CMA consulted on its provisional decision before making a final decision in November 2014.

The FCA responded to the CMA’s consultation on its provisional decision to refer the markets for personal current accounts and SME banking - In our response we make some general comments and observations on the CMA’s provisional decision. We also set out elements of the FCA’s past and present work programme in retail banking that we hope will assist in understanding the markets.

The FCA and the CMA will maintain their collaborative approach to boost competition in retail banking. This collaboration will also extend to the Payment Systems Regulator given the links between payment systems and retail banking.

Work already undertaken by the FCA includes: reducing regulatory barriers faced by new bank applicants who may provide more competition in the future; a market study into cash savings (the interim findings of which have now been published); and a programme of work to promote competition and innovation by making it easier for start-ups and established businesses to bring innovative ideas into financial services markets.

The FCA has also launched its review into the effectiveness of the Current Account Switching Service in September, 2014. Alongside this we are also studying the costs and benefits of account number portability as a way of increasing competition in banking. We expect to publish in the first quarter of 2015.

The CMA’s work on personal current accounts and its decision on a market investigation reference.

Review of barriers to entry and expansion in the banking market

For more information on the Payment Systems Regulator