17 May, 2018 | Bankis
Many owners of small companies in Britain are receiving a letter from their bank over the coming weeks. Royal Bank of Scotland wrote to 220,000 of its customers requesting to consider taking their business to a competitor by switching to a different bank. “Yes, we really are asking you to switch to another bank. We realise that this is the strangest thing a bank has ever asked their customers to do,” the letter reads.
This move could, in fact, be the most sensible thing that has happened in the small business banking industry for years. In return for its £45 billion taxpayer-funded bailout, RBS, is being pushed to provide £350 million for competitors and to offer incentives to customers to switch. With the “Big Four” in banking — RBS, Lloyds , HSBC and Barclays — the reason behind this move is to increase competition and give customers more choice and alternative on their business banking options. A previous plan to sell business customers, housed in RBS’s Williams & Glyn division, to Santander fell apart in 2013. Plan B, to float the unit, turned sour three years later.
Anne Boden, a former chief operating officer at Allied Irish Bank who now works for Starling Bank, believes that the latest plan may turn out be the best way out for beginning to break up the oligopoly. She said that the so-called “alternative remedies package”, the official name for the schemes, “could create far more new competitors in the market than any other previous idea. This has the potential to add three or four new players with sizeable market share.” However, she admits that the plan could go wrong if it is not handled with care. An independent body has been trusted to administer the innovation fund and the switching incentives, but the process has been rocked by delays due to the difficulty in finding the right people with the industry knowledge who are not affected by their employment history.
Utility Warehouse’s business model is different as it allows customers to become agents to sign up new customers. This firm gets a good high score (74% excluding incentivised members, as opposed to 79% including them).
Also there is also a dispute over how the cash should be divided. One of the keys of disagreement is the desire of Santander, to apply for grants that some feel should be used towards smaller players. Nicky Morgan, chairwoman of the Treasury select committee, is concerned over “pay-outs from RBS to another large and well established banks” defeating therefore the competition objective of this switching idea. Ms Boden believes that as the fifth-biggest lender, Santander shouldn’t receive any cash as that “doesn’t help to open up the market”. Santander however is a small player in the business industry, with a market share of less than 5 per cent, and there is therefore support from some in the industry that Santander’s participation is legit. With a goal for at least 120,000 of the 220,000 eligible customers to switch to one of RBS’s competitors, there is a feeling that some banks with established services will need to provide confidence for small companies.
Along with Starling, Metro Bank, CYBG, TSB, Virgin Money, Nationwide, and Aldermore are among those to compete for funds. Nationwide and Virgin have stop its plans of launching a full business banking offering, due to the costs of gaining enough customers to reach profit. However now, with incentivised switching these banks may enter the business game.
Paul Lynam, chief executive of Secure Trust Bank, has said that providing the majority of the funds to those providing business current accounts is “totally misguided” and will not increase competition, as it excludes the majority of finance providers to small companies, which don’t offer business current accounts. However Ms Boden disagrees: “Many people are doing specialist, niche stuff [in small business finance], but someone needs to do useful, transactional banking for businesses. There aren’t any other new banks providing business current accounts, it’s just us. What we need is more people providing everyday services.”
The Competition and Markets Authority admitted that 80 per cent of small business banking being controlled by only four institutions was causing poor service, with complex current account fees, unclear loan fees and weak switching options. The “alternative remedies package” comes from the £45 billion bailout that saved Royal Bank of Scotland from going bust during the financial crisis in 2008. Since this qualified as “state aid” under European Commission rules, the bank agreed to reduce its size market share by selling off five parts of the business. However, finding a solution for 220,000 small business customers by selling its Williams & Glyn unit to a competitor, or setting it up as a standalone bank, proved a long and risky road to walk. Instead, European regulators agreed to a plan for RBS to give up £350 million to incentive small businesses to switch accounts, and £425 million to help competitors to upgrade their services for small companies. Once an independent body has been chosen to regulate the process, it is expected to take 18 months to distribute £225 million to “eligible bodies in relation to business current accounts”, the government says. A “business banking switch” website will be created to help the businesses being targeted to compare offers from the participating — and competing — banks.