Banking for SMEs remains a highly concentrated industry, with 85% of business current accounts in England and Wales provided by the four largest banks.
A joint study by the Competition & Markets Authority and the Financial Conduct Authority (FCA) also found that concentration in Scotland and Northern Ireland is even greater.
Meanwhile, the supply of business loans is also concentrated, with nearly 90% by volume being provided by the largest banks in all four nations.
This situation with regard to current accounts and loans is very similar to the situation that existed in 1999.
Almost 60% of business current account customers at the four largest UK banks also have a personal current account with the same bank. This is because there is a propensity for start-up businesses to choose their business current account provider based on where they hold their personal current account.
As a result, larger banks have an advantage over smaller, stand-alone providers of business banking services and those that do not have a strong presence in personal current accounts.
Metro Bank is the only new business current account provider to have entered the market in recent years.
The study noted that there were significant barriers to new banks entering and expanding in the market. These include the fact that SMEs still value branches and the difficulty that smaller and new banks can have accessing the payment systems that are key to offering business current accounts.
Furthermore, customers lean towards inertia and are reluctant to switch banks, a situation that is not helped by the fact they believe there is little to distinguish one bank from the next. So there are insufficient numbers of profitable customers that are sufficiently easy for smaller and newer providers to acquire.
Commenting on the study, Christopher Woolard, director of policy, risk and research at the FCA, said: “While there have been some recent improvements, for small businesses, competition in the banking system isn’t working as it should. The market is still concentrated, switching between providers is low and those running small businesses don’t believe there is much differentiation in terms of the products on offer and the standard of service they receive.
“Small businesses are the lifeblood of the British economy, employing more than half of those in work in the private sector, which is why it is vital that they have access to a banking market that works for them.”
The four largest banks in the UK are Barclays, HSBC, Lloyds Banking Group and Royal Bank of Scotland.
Sally Percy is editor of The Treasurer