The UK Competition and Markets Authority (CMA) has ordered the UK’s largest SME lenders* to produce new SME loan pricing and eligibility tools.
Nic Beishon, Head of Commercial, Equifax UK & Ireland (pictured above), comments: “The CMA’s order to improve SME lending services is a much-needed step to increase competition.
“We are in an uncertain environment for the UK economy and all moves to support our smaller businesses should be welcomed. Mark Carney has given banks ‘no excuse’ not to pass on rate cuts, and the CMA’s moves will help ensure that SMEs can borrow at the most competitive rates available.
“These tools will bypass time-consuming paperwork and make it much easier for SMEs to find out if they’re eligible for loan. By speeding up the decision making process, and providing an early indication of interest rates, SMEs will be much more likely to shop around for the best deals.
“The banks covered by the order need to prioritise implementation to make sure they have the right processes and technology to support robust lending decisions under the new regime. While only four banks are obliged to introduce the tools at this stage, we believe that other lenders, including challenger banks, should introduce the same tools to ensure their offering stacks up against larger players.
“Access to lending is vital to support the growth of SMEs, yet the CMA found that less than 20% of SMEs have a loan. Increasing the uptake will enable more businesses to invest for the future.”
Retail banking technology
The order is part of the CMA’s final report on its ‘Retail banking market investigation’. The provisional report issued in May cited the HSBC loan eligibility tool developed with Equifax as the most advanced it is aware of on the market.
The CMA is relying on a technological revolution driven by the introduction of Open Application Programming Interfaces (APIs) to kick start competition in the UK market for personal and business bank accounts, following its two-year investigation into the sector.
At the moment only 3% of personal and 4% of business customers switch to a different bank in any year. To transform the market the CMA believes banks need to be made to provide their customers with the right information so that they can easily find out which provider and type of account offers best value for them.
The most eye-catching proposal is a requirement by banks to introduce an Open API banking standard by "early 2018". This will enable personal and SME customers to safely and securely share their unique transaction history with other banks and trusted third parties.
The CMA is also demanding that banks provide technical support and financial backing to an initiative by independent charity Nesta to develop a set of tools providing comprehensive information about bank charges, service quality and credit availability.
Beishon said: “The banks covered by the order need to prioritise implementation to make sure they have the right processes and technology to support robust lending decisions under the new regime. While only four banks are obliged to introduce the tools at this stage, we believe that other lenders, including challenger banks, should introduce the same tools to ensure their offering stacks up against larger players."
Finextra reports that while the watchdog lauds these and other measures as a "wide-reaching package of reforms", campaigning groups have bemoaned the absence of tougher sanctions to break the stranglehold of the UK's top banks.
Kevin Mountford, banking expert at MoneySuperMarket, said: “Those looking for wholesale reform of the banking market are likely to be holding their heads in their hands this morning. The CMA’s final remedies are more ‘gently does it’, as opposed to the seminal, watershed moment for British banking that many had been looking for."
The raft of challenger banks vying to take on the UK's biggest banks have also slammed the watchdog for failing to address the capital requirements foisted on new banks trying to break into the market.
Craig Donaldson, Metro Bank chief stressed: “After more than two years in the writing and costing several millions of pounds, we are astonished that the CMA's findings do not attempt to level the playing field for new entrants and challenger banks, by recommending that the PRA looks into disproportionate capital requirements.
“Disproportionate capital requirements are anti-competitive and unduly support the large incumbent banks by allowing them to hold up to 10 times less capital for the same loans than challenger banks.
“The CMA was given a rare opportunity to support and develop competition in banking, it is disappointing that they decided not to get at the root of the problem, but rather they missed the point and tinkered around the edges.”
*Royal Bank of Scotland, Lloyds, Barclays and HSBC.