Following a 19 month review into the retail banking sector, we recently saw the first recommendation put forward by the Competitions and Markets Authority (CMA). With the report intended to increase competition amongst the major high street banks, SMEs of the UK awaited hopefully expecting to see some recommended measures that would make access to finance easier for them.
But, instead of breathing a sigh of relief, it was an anti-climactic day for small businesses across the UK. Whilst suggestions to cap overdraft fees and the introduction of comparison tools are a step in the right direction, the CMA has missed its opportunity to truly revolutionise the industry. Instead, it has unearthed the fundamental flaw with high street banking – the concept of ‘free’ current accounts is actually a myth.
In a study that we conducted amongst UK SMEs last year, we found that the average business is paying £468 a year for its supposedly ‘free’ account, and a third believe their bank “actively seeks ways to sneak in fines and fees that they do not understand”. Due to these extortionate costs, 60% of those questioned have avoided opening a high street bank account altogether.
The CMA should have taken this opportunity to end ‘free’ accounts once and for all, thus increasing competition amongst challenger financial services providers that are able to provide a better service to the smallest of the UKs businesses. Many FinTech providers have been operating transparent pricing models since their inception, meaning that SMEs have a clear view of the costs that they will incur, and are able to control any credit that they may want, or not want, to take on. For example, many alternative finance providers will not enforce an overdraft on a customer if they do not specifically request such a service.
In the report, it was also suggested that banks should alert customers when they are anticipated to default on a direct debit payment. However, many alternative finance providers already operate such a service, informing customers if they are likely to miss a direct debit payment the next day, thus giving them the opportunity to solve the issue if possible before seeing a charge added to their bill.
In addition, it is key to remember that some SMEs do not even require any credit related products, yet fail to gain access to even the most basic of banking services: a current account. SMEs are burdened with extensive credit checks to complete, failing these most of the time as they haven’t been able to build up a trading history yet. Essentially, these checks are an unnecessary hurdle enforced by the banks to assess whether they will be profitable to them. In reality, banks lose money on accounts that sit unused and this cost has to be made up somewhere – usually, through stealth charges and punitive overdraft fees.
Whilst the CMA has the good intention of driving change in the sector, these measures are unfortunately likely to have a limited impact on the way banks operate. Instead, the high street banks should learn from their FinTech counterparts. Once full transparency is imposed amongst the banking sector, SMEs of the UK will have a far better understanding of the financial services options available to them, ultimately driving true competition within the sector and a better selection of, sometimes more suitable, providers.
