The report makes several constructive suggestions – notably those concerning transparency, as well as the push for more standardised information on switching and more comprehensive comparisons for the products used by SMEs – but it is difficult to see it as anything other than a missed opportunity to make a meaningful change.
The ambition of the report to create a more technologically sophisticated market with greater choice for consumers is the correct one. But the approach fundamentally undersells that ambition.
Ultimately, greater choice will be driven by greater competition. More competition will naturally drive innovation and technological progress. True competition is not fostered by rules but by the ability of providers to compete fairly at the most basic level. I believe this is where the CMA should have focused its attention and made clear recommendations.
The disadvantage faced by newer banks in respect of disproportionate capital requirements relative to the larger banks is arguably the major issue for banking competition. Although the report recognises this, this disadvantage will persist based on the CMA recommendations.
The fact that this is not a new issue, and has previously been recognised by the CMA, makes the omission of clear recommendations even more disappointing. At present, challenger banks have to hold up to 10 times more capital than the incumbents against the same-sized loan, making it difficult for them to compete with the traditional big banks.
This distorted playing field has a real impact on the UK’s wider economy. In a post-Brexit world, the effective provision of credit to smaller businesses will be even more essential to the UK’s economic competitiveness. In recent years, it has been the challenger banks that have expanded their lending to this segment.
It is estimated that between 2012 and 2014 the big banks’ loan books shrank by 2.9 per cent year on year, while smaller banks grew theirs at a rate of 8.2 per cent. Likewise, estimates suggest that around 20 per cent of gross lending to SMEs is provided by challenger banks.
A more level playing field would free up significant capital for the challenger banks that could be lent to customers underserved by the larger players or who want a greater choice of options.
As they stand, the rules simply defend the oligopoly of the incumbents in a system recognised to be flawed. Words like “fintech” and “multi-channel” are often bandied about, but it is the so-called challenger banks, unshackled by legacy issues and built for the purpose of lending to poorly-served customers at a time when others are pulling back, who are creating and offering the products and services that today’s customers so obviously need.
Challenger banks are not after any special treatment, just a banking system in which they can compete in order to support the goal of better choice for consumers.
Ironically, I believe that the problem is widely recognised by both regulators and legislators. In this post-Brexit environment, it needs to be quickly addressed.