How Open Banking can revitalise competition in business banking
Competition in financial services is good for customers. To gain a larger share of the market, providers need to innovate and deliver great value. This competition means customers get better services designed with them in mind, at fair prices.
At Tide, this has always been how we work: developing the best business banking platform for sole traders and small companies, driven by feedback from our members. In this article (also published in City AM) our CEO Oliver Prill explains how Open Banking can reignite competition in business banking.
Banking for small and medium-sized businesses has been a persistent problem. In 2016, the UK Government set out to challenge the oligopoly of high street banks. A sizable alternative lending sector was created, accounting for up to 30% of SME lending pre-coronavirus. Challengers have captured over 20% of business current accounts. Many have been supported by grants from the £775 million RBS Alternative Remedies package set up to support competition.
However, this progress is at risk. A number of challengers have reduced their ambitions for funding reasons. Metro Bank and Nationwide have returned £100 million they were awarded from the RBS package and the UK’s fintech sector has seen investment fall by as much as 30% during lockdown.
More problematic still, the Government’s Business Lending Support Package has unintentionally disadvantaged the non-banks that have been the drivers of competition. It took too long to accredit alternative lenders for the various loan schemes, meaning many SMEs had to return to the high street for support. Once accredited, non-bank challengers were not given access to the low-cost Bank of England refinancing available to the banks. Direct Lending via the British Business Bank was not available even though the mechanisms are.
That’s why an estimated 95%+ of all Bounce Bank Loans have been issued by the big five banks. Because they require business current accounts to feed loan repayments, a significant new barrier to switching accounts has been created: the Bounce Back Loan repayment terms of six years.
Competition needs to be reignited
The £100m of RBS Alternative Remedy funds returned by Nationwide and Metro provides an immediate opportunity. Submissions are in, and the decision on who gets the grants is expected in September 2020.
To restart competition, SMEs need challengers to offer innovative services that can attract them to switch. These services must focus on the areas that will be vital for SMEs in the post-coronavirus environment.
For example, the ClearBank submission – in partnership with Tide – plans to provide an alternative to on-balance-sheet funding by creating an unparalleled funding network open to third party lenders and investors. To help post-Brexit, we’ll be offering support to SMEs who import and export. We’ll also help with services to drive digitisation and carbon reduction.
Reduce barriers to switching
History has shown that even with powerful attractors, SMEs won’t switch if there’s significant friction.
With new barriers, we need to radically re-imagine competition. We’ll use Open Banking to give small business owners the option to switch their business to Tide but not their bank account. Users will be able embed their existing business account with another provider into our platform, and do their business banking through us. Make payments, create and send invoices, managed their expenses, access our funding network and more. All without the complexity of having to move their current account.
As we face the biggest set-back in business banking competition in recent memory, the £100 million grant fund is a vital step in reigniting competition. It’s critical to helping UK SMEs turn crisis recovery into an opportunity.