Julian Rose questions whether challenger banks, alternative finance, or the competition regulator will have the greatest impact on SME finance

In the week that Aldermore floated and Shawbrook confirmed its plan to list on the stock market in April, the Committee sounded a cautionary note on the role of the challenger banks as well as providers of ‘alternative’ finance (crowdfunding/peer-to-peer).

The SME banking market share of banks outside the top five largest is less than 5% and the peer-to-peer sector represents only around 1% of new SME lending.

“Challenger banks and alternative lenders are therefore not yet at a scale sufficient to challenge incumbents” the Committee concluded.

The Committee came close to calling for a break-up of the large banks. ‘Behavioural’ remedies (such as data sharing and faster account transfers) have not addressed the competition problem in SME banking, the Committee concludes, so ‘structural’ reforms may be “essential to secure a reduction in concentration in the market”.

The Competition and Markets Authority’s (CMA) ongoing inquiry into SME finance should include a “detailed examination” of whether ‘structural’ remedies (such as forced break-ups) are needed, the Committee recommends.

One structural option that the CMA is likely to consider is to require the large banks to separate their business current account and business lending activities. As noted in our regulatory update on the CMA’s inquiry last November, the CMA is considering the possible anti-competitive effects of linkages between business current account and lending products.

The implications for asset finance are unclear.

So far the CMA has seemed fairly oblivious to the importance of leasing. The CMA’s draft market study on how SMEs apply for loans didn’t even recognize the existence of finance brokers (AFP has pointed this out to the CMA). What is becoming clearer is that the CMA inquiry – which has another year to run – could end up having a bigger impact on the SME lending market than the rise of challenger banks and alternative finance.

The CMA has the legal duty and powers to take whatever steps are necessary to remedy the competition problems that it identifies, independent of who is in government. Increasingly this inquiry is looking like it will lead to decisive action.  

Julian Rose is the founder of Asset Finance Policy Ltd, previously he was Head of Asset Finance at the UK Finance & Leasing Association. www.assetfinancepolicy.co.uk