Throughout the economic downturn, banks were rubbish at lending to small businesses - and things haven't changed as recovery has taken hold. So it’s not exactly surprising that the Competition & Markets Authority (the successor to the Office of Fair Trading) has recommended a full competition inquiry into retail banking and lending to small businesses, which could lead to new rules and regulations or even banks being split up.
‘There's not enough rivalry there [for banks] to be really falling over themselves to serve the customer, come up with new innovations and come up with the best value and best service they can provide,’ CMA chief exec Alex Chisholm told the BBC.
But breaking up any of Britain’s big four high street banks (HSBC, RBS, Lloyds and Barclays), which account for 77% of current accounts, is unlikely to be the easy fix that many politicians, Ed Miliband chief among them, seem to think it is.
1. There is no guarantee it’ll increase small business lending
There is no guarantee broken-up banks will lend more to small businesses - they will still need to maintain certain capital and liquidity levels. In fact, high street banks removed from the bosom of a bigger, better capitalised organisation will probably need to be even more risk averse, especially given the enormous costs of splitting up the big boys. As Daniel Lasry, an analyst at brokers Bernstein, told City AM, ‘lending is already low and this would make it even lower. But who am I to say they won’t do something ridiculous, when political pressure could be involved?’
2. Giving into political pressure is not good business
Speaking of political pressure, bowing to populists, or being seen to do so, isn’t a good way to make policy. It may well be that the CMA is entirely independent and comes to the conclusion banks should be broken up all by itself. But chances are its decision is likely to be marred by the fact the idea was parroted by banker-bashing politicos, with very little reasoned, neutral debate. And that is not a solid foundation to build new banks on.
3. Challenger banks need time to make an impact
New banks, including Tesco (which launched its new current account last month), Metro Bank and TSB, only make up around 5% of the current account market at the moment, with TSB the majority of that. But the latter was only fully born out of Lloyds earlier this year, while Metro Bank was an entirely new brand. RBS is also due to spin out Williams & Glyn by 2017, so there are already plenty of enforced breakups that have already happened or are underway.
There are clearly very high barriers to entry for challenger banks, but the ones that have made it in are growing fast. That makes the CMA look over-impatient, waiting for them to gain traction. Yes, splitting up banks further would automatically create more ‘competition’, but that won’t do much to help the new kids on the block or dismantle barriers to entry.
4. Alternative finance is growing
Yesterday, peer-to-peer business lender Funding Circle announced it had raised $65m in Series D funding. It is still a relative minnow compared to banks. While it has facilitated more than £300m of business loans in the four years since its launch, banks drew £2bn from the Bank of England’s Funding for Lending Scheme in February and March - and that was a bad couple of months.
But Funding Circle has been growing 150% in the UK every year since its founding and that rate is only increasing. It’s not the only non-bank financier on the block either - there’s startups that offer finance against companies’ invoices, equity crowdfunders and more. Instead of the expensive and probably ineffective remedy of bank break-ups, the CMA could do worse than to recommend more support for alternative business finance.