The Cma’s Hidden Trap: Commoditising Sme Banking Services

Eighteen months of investigation, and the decision is in: the banks will not be broken up. The Competition and Markets Authority’s (CMA) report into the retail banking market has identified several areas where the banking industry needs to improve, but it seems that the worst fears of the big four banks have not been realised. Instead, the CMA will recommend that the banks should be required to advertise the 7-day switching service more aggressively, and nudge customers to review their financial situation at certain ‘trigger points’.

But while the banks are mopping their brows with relief, there is one bullet point in the CMA report 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 between accounts, and because business owners do not see checking for the best rates as a priority, means that the majority of SMEs stay with the same bank for a long time. Our research indicates the most SMEs have been with their bank for an excess of ten years.

Comparethebanks.com

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.

Price comparison websites have been very successful because they take a potentially complex decision and make in simple. Shopping around for insurance, for example, is no longer a matter of getting quotes from a number of brokers and attempting to compare them. Instead, all you need to do is fill in a website form and pick the best value deal. There may be other considerations, such as breakdown cover or courtesy cars, but a price comparison website’s main focus is, unsurprisingly, on price.

The 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 – much as the government has done with energy suppliers. The ‘Power to Switch’ campaign from the government claimed that £2.7 billion is being overspent by 13.5 million UK households, as they haven’t considered switching supplier. Banks 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. Research we 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 than institutions that support small businesses. They provide basic products when asked, rather than providing the advice and services for which they are highly valued.

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. This clearly cannot continue if banks are going to compete with new players entering the market.

How to avoid being ‘just another bank’

If the CMA report’s recommendations are accepted by the government, and a comparison website for SME bank accounts is set up, banks will 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.

Our research found that, while banks and small businesses had moved towards a transactional relationship, there remained an appetite from businesses for a more engaged relationship, and a need for additional services that could help these businesses grow and succeed. Only 3% of all bank customers switched bank accounts last year, yet we found that a third of small businesses would move if they were offered ‘business support’ services alongside their other banking services.

So, for example, a small business that has relied on word-of-mouth recommendations, and the occasional incoming call via a business directory, may need advice on growing the business and making sure they are making the most of any sales leads. One solution would be to offer a loan or an overdraft to finance growth. But a more engaged relationship and the ability to offer additional services could mean the bank can instead offer a Customer Relationship Management (CRM) system – potentially a far more valuable service than finance.

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.