11th May 2021

SMF/Metro Bank research says pandemic sets back competition in banking, leaving consumers and SMEs worse off
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New research by the Social Market Foundation(SMF) in partnership with Metro Bank has revealed the extent to which the COVID-19 pandemic has set back competition in banking– with the share of personal current accounts now more concentrated than before the 2008 global financial crisis.

The research also identified that Government-backed lending schemes brought in to support businesses during the pandemic –namely the Coronavirus Business Interruption Loan Scheme (CBILS) and Bounce Back Loan Scheme (BBLS)–have entrenched the concentration of lending in the hands of the ‘big five’ incumbent banks.

As a result, in 2020, challenger and specialist banks’ share of total gross lending to SMEs fell to 31%, a significant decline from 48% the previous year and the lowest on record.

Less consumer switching has led to lost opportunities for better rates, rewards and services. The research revealed a significant decline in customers switching personal current accounts during the pandemic–with figures falling almost a third to just 1.4% in 2020. While this undoubtedly reflects the pressure households have been under over the course of the year, it shows banking still lags well behind other sectors, such as electricity, where switching rates were as high as 20% during the same period. It means there could be a backlog of customers who are now worse off as a result of not switching. Meanwhile, the major banks continue to be subject to limited pressure to provide better service, cut prices or improve product quality.

Despite a wave of new and digital entrants to the banking sector, significant obstacles remain to challenger and mid-tier banks seeking to scale up and challenge the big five.

The report argues that the scale and margin of unsecured lending, the limited amount of consumer switching, and the impact of capital requirements are preventing challenger banks from increasing their market share.

Specifically, the Bank of England’s proposed MREL requirements–the minimum requirement for own funds and eligible liabilities–is further hampering competition. The threshold at which it is set is relatively low compared to other countries and has led to mid-tier banks having to borrow money to fund this requirement at a significant premium to the big five. This has tangible costs to the UK economy, reducing lending capabilities of the mid-tier banks, with SMEs missing out on nearly £24bn of potential additional lending.

Daniel Frumkin, Chief Executive Officer at Metro Bank, comments “The SMF report confirms what many in the sector have known for a long time: the continued dominance of established high street banks and unintended consequences of regulation which cements their market share is leading to worse outcomes for both consumers and small businesses. Now more than ever, customers need as much choice as possible to ensure they are getting the best support from their bank. Challenger banks like Metro Bank want to do more to help promote competition within the sector, but we are hampered by the barriers to growth that we–and other mid-tier organisations–face. Looking ahead, we are hopeful there is an opportunity, as part of the Bank of England’s MREL review, to unlock the pathway to growth while preserving the resilience of the banking sector.”

James Kirkup, Director of the Social Market Foundation, added “Competition is good for consumers. It makes companies work harder to give them better products and services at lower prices. Supermarket shoppers and people paying their energy bills have experienced the benefits of competition among suppliers, but in sectors such as banking and telecoms, there still isn’t enough competition.

Outside the European Union and after the pandemic, Britain needs to decide on its economic priorities. Anyone who wants an economy that works better for consumers and pushes companies to innovate should have greater competition at the top of their agenda.”

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