Around 90% of SMEs went to their business current account (BCA) provider when looking for loans, an investigation by Competition and Markets Authority (CMA) has revealed.
The investigation found that 69% went to their main BCA bank for invoice discounting and factoring and 76% for commercial mortgages.
Go deeper with GlobalData
It was also found that 60% of SMEs considered only one provider when seeking lending and 25% did not consider other providers because of the ‘hassle’ or time associated with applying for finance.
Apart from the established relationship with the bank, CMA said that SMEs choose the bank in which they have a BCA because of barriers to searching for alternatives.
"It is difficult for SMEs to compare prices and other terms across banks. Prices are opaque and lending products are complex. Banks do not publish indicative tables of interest rates and management fees unlike other lending products such as residential mortgages. In addition, there is a lack of tools to help SMEs make comparisons, which may particularly affect smaller SMEs without specialist financial capability. There are a small number of business loan price comparison services, although these provide no information on interest rates and only limited information on other terms," wrote CMA.
CMA found that weak customer response is having the adverse effects in reducing banks’ incentives to compete on price, quality and to innovate in SME lending. CMA said that it also weakens the ability of new entrants and small banks to grow organically.
How well do you really know your competitors?
Access the most comprehensive Company Profiles on the market, powered by GlobalData. Save hours of research. Gain competitive edge.
Thank you!
Your download email will arrive shortly
Not ready to buy yet? Download a free sample
We are confident about the unique quality of our Company Profiles. However, we want you to make the most beneficial decision for your business, so we offer a free sample that you can download by submitting the below form
By GlobalDataAs SMEs predominantly contact the bank that provides their BCA, the low switching rates of BCAs is also an interesting parameter.
The investigation found that over 90% of SMEs stayed with their BCA when the initial free banking period is over and that 51% of start-ups chose to have an account where their founder had a personal current account.
CMA highlighted some potential remedies to increase competition in the market, which include:
– Requiring banks to prompt customers to review the service they receive from their bank through receiving individual messages at certain ‘trigger points’. These trigger points could include a loss of service, closure of their local branch, unarranged overdraft charges or a change in the terms and conditions of their account. In the case of SMEs a key trigger point could come at the end of free banking periods.
– Making it easier for consumers and businesses to compare bank products by upgrading Midata, an industry online tool, launched with the support of government, that gives consumers access to their banking history at the touch of a button.
– Requiring the creation of a new price comparison website for SMEs – currently nothing effective exists to fulfil this role.
– Requiring banks to help raise public awareness of, and confidence in, switching bank accounts, through increasing their funding for a widespread and sustained advertising campaign promoting CASS and improving the service it offers.
– Requiring better sharing of information with credit reference agencies, banks and financial advisers – making it easier for SMEs to shop around for loans and cutting out the need for multiple application form filling.
