Small Talk: Forget the regulator, it’s down to the customers to force better competition in business banking

Small businesses pleased that the Competition and Markets Authority’ has decided to refer the banking sector for a full competition inquiry should not get too excited. The truth is that if small and medium-sized enterprises (SMEs), which the CMA agrees suffer at the hands of a lack of competition in the banking sector, really do want a better deal, they are going to have to fight for it.

In many ways, the most shocking parts of the CMA’s report into SME banking are not those that focus on the lack of competition – we knew all about that from the three almost identical reports published by similar authorities over the past 12 years – but the findings concerning the apathy of SMEs themselves.

To put it bluntly, one of the reasons new entrants offering better products and services struggle to make an impact in SME banking is that SMEs can’t be bothered to switch to them. Although large numbers of small businesses routinely complain about their dissatisfaction with their existing banks, only a handful ever do anything about it.

So, for example, SMEs collectively hold 3.5 million business current accounts, the vast majority of which are covered by the new seven-day current account switching regime that came into effect last year. Yet over the six months to the end of March, just 7,330 SMEs took advantage of the service.

Similarly, while the past five years has been dominated by accusations that the banks won’t lend to smaller businesses, the CMA’s data reveals that seven in 10 SMEs approach only one provider when looking for a loan, while 90 per cent take out the loan from their current account provider.

Why are smaller businesses so reluctant to shop around or switch bank? Well, one explanation, the CMA concludes, is the prevalence of the attitude that “all banks are the same”, which feels like a lazy, ill-informed reason for sitting on your hands. Another problem, the CMA suspects, is that SMEs tend to prioritise good service over competitive pricing in their banking relationships – this is a difficult issue for customers to research in the market.

Whatever the explanation, there is simply no point in encouraging new banks to enter the SME marketplace, or even embracing more radical solutions such as breaking up existing players into smaller entities, unless smaller businesses are prepared to take advantage.

Healthy competition doesn’t occur simply because there are lots of competitors in a particular market – it also requires each of those competitors to feel the pressure of knowing that their customers could take their business elsewhere at any given moment. That competitive tension does not currently exist in the SME banking sector – even switching rates in the notoriously uncompetitive energy industry are higher.

There is a chicken-and-egg element to this problem. Small businesses don’t shop around because they think they won’t be better off by changing banks. In turn, banks don’t bother to compete for customers because they don’t expect them to come. However, there are ways to break this logjam. We do now have new entrants to SME banking – the likes of Metro Bank, Aldermore, Shawbrook and others – that should be less affected by the ‘all-banks-are-the-same” mentality. Equally, new players from outside the banking industry are also potentially disruptive – the crowdfunding platforms, for example. These innovators have even less reason to be tarred with the same brush as traditional banks.

The bottom line, however, is that small businesses unhappy with their current provision must seek out these new entrants – both to take advantage of what they are offering and to put greater pressure on the established banks.

The CMA talks a good game and the banks will no doubt be irritated by yet another inquiry into the sector. In the end, however, only customers can be the driving force behind better competition in SME banking, not a regulator. And with the experience of so many previous investigations to draw on, both the CMA and the banking sector know that very well.

China’s outdoor clothing and accessories market grew by 28 per cent last year according to research consultant Euromonitor, and is now large enough to support international retailers such as North Face and Jack Wolfskin, as well as a number of local operators. The third largest company in the latter category, Fraspens Outdoor Group, will today announce its intention to float on the Alternative Investment Market later this month in an IPO that will raise £4m and value the business at around £40m.

Fraspens sells its products to 16 independent regional distributors across China at two sales fairs in spring and autumn. Products are then made to order and sold by the distributors in several hundred Fraspens-branded retail outlets across China. The advantages of operating in this way include better visibility over orders and less anxiety about unsold stock.

In a fast-growing market, Fraspens is perfoming well. Sales last year came in at around £39m, generating profits after tax of £6.6m. Managed out of China, the company’s non-executive directors include Nigel Payne, who UK investors may recall as the former chief executive of Sportingbet.

GTS Chemicals, China’s largest manufacturer of ammonium sulphite, is to list on the Alternative Investment Market, the company will say today. GTS has a fundraising target of £3m and is expected to be valued at a little over £35m.

The company may be unknown in the UK but has a reputation as an environmental champion in China, where its ammonium sulphite is used to manufacture straw-based paper out of waste materials. China wants to manage the environmental impact of the disposal of 700 million tons of straw annually.

The business has strong relationships with paper manufacturers, but has also expanded into new markets in recent years, capitalising on China’s growing determination to recycle. GTS has been growing sales at a rate of 66 per cent a year since 2011, with pre-tax profits last year coming in at around £10m on sales of roughly £45m.

“We’re a financial adviser, but a different type of firm to most other financial advisers – we specialise in helping people manage settlements they receive from claims such as clinical negligence and personal injury. It is crucial work – people in this situation are often incredibly vulnerable and need expert help to make the best of their finances, with the settlement they receive often required to last for the rest of their lives.

“Part of the reason I joined the business was personal – my brother fell from a window at 18 and suffered a spinal injury that left him in a wheelchair. Historically, victims who received a settlement didn’t get any real financial advice – they were just left to get on with it.

“The business in its current form really got going in the mid-80s, when the idea of structured settlements came to the UK from the US, particularly in connection with the thalidomide cases. Rather than getting one upfront lump sum, people receive a smaller sum at first and then regular payments for as long as they need them – our job is to help ensure these settlements are set up and managed in the best way.

“Often we acquire new clients through referrals from solicitors and barristers and end up managing all their assets on an ongoing basis. They’re typically in need of low-risk returns to maintain their standard of living by staying ahead of inflation.

“We’re now listed on the Alternative Investment Market and last year our revenues were up by almost 15 per cent to £5.5m.”