The CMA’s hidden trap: commoditising SME banking services

Eighteen months of investigation, and the decision from the Competition and Markets Authority is in: the banks will not be broken up.

But while the banks are mopping their brows with relief, there is one bullet point in the provisional findings of the CMA’s Retail Banking Market Investigation that may affect them more than they realise. The CMA is concerned that small business owners simply open business bank accounts where they have their personal accounts, rather than shopping around. The difficulty in making easy comparisons means that the majority of SMEs stay with the same bank for a long time. Our research indicates that most SMEs have been with their bank for an excess of ten years.

Go compare

This ‘lack of competitive pressure’ has led the CMA to recommend the introduction of a new price comparison website for SME banking. As with any comparison website, this will calculate the best deal based on the SME’s requirements.

Commoditisation of banking

This is a problem for banks offering SME services, as it takes what should be a relationship based on trust and engagement and reduces it to a number: commoditisation of bank services. The CMA, concerned about a lack of competition, wants to increase competition by focusing on price. The regulator has taken a similar approach in driving competition among energy suppliers in the ‘Power to Switch’ campaign. This saw the government claim that 13.5 million UK households are overspending £2.7 billion, as they haven’t considered switching supplier. Banks now risk a similar campaign claiming that SMEs are overspending, and the solution is to move their account elsewhere.

Reduced customer engagement, and a mere transactional relationship between the customer and bank is the biggest threat banks face. Digital interaction has overtaken physical interaction as the dominant method of engagement. Proprietary research, conducted earlier this year found that 70% of small businesses have had no contact with their relationship manager, and that banks now act more as reactive customer service outlets rather than institutions that support small businesses. They provide basic products when asked, rather than providing the advice and services that business customers really value. The result is that banking for small businesses is already becoming commoditised, and the danger is that the CMA ruling will serve to accelerate the process.

The result is that 67% of UK SMEs are now happy to look elsewhere for financial services and more than half are tempted to switch banks. With the rise of FinTech players offering niche financial products and new challenger banks, small businesses now have more choice than ever before if they want to switch. This trend cannot continue if banks are going to avoid customers voting with their feet.

Avoid being “just another bank”

Banks now face a choice. Either accept that their products are a simple commodity and compete only on price, or offer extra services and compelling reasons that boost loyalty among their customer base.

When we conducted our research, we recommended that banks should consider offering additional services because of the difference it could make to their bottom line. This is still true, but the potential commoditisation of SME banking services makes the issue more urgent. Unless banks become trusted business partners for SMEs, there is a real risk of banking services becoming a simple commodity, and the lowest bidder will win outright.

Find out more about digital banking for small businesses and SME fintech by visiting the financial institutions section of our resources page