Last week saw the launch of another major inquiry into banking. This time it’s the Competition and Markets Authority looking at retail banking and small business lending. The good news is that CMA has teeth, so this could have serious implications for the high street banks. The bad news is that it will take 18 months to pass judgement, with plenty of opportunity for the vested interests to persuade any new government to kick radical suggestions into the long grass.
At the same time there is new research showing the rapid acceleration of alternative finance players into the saving and loans market. Peer to peer lending is coming of age, with growth figures for the sector pushing it towards £4bn in 2015. The CMA will report in 2016. If their review fails to address barriers to alternative finance and simply looks at tradition banking business models, any measures they recommend could be seriously behind the curve.
People want more control over their own money
One of the key factors behind the popularity of peer to peer lending, and related crowdfunding sites, is the transparency they offer. In a recent Nesta survey 81% of people who lend through peer to peer business lending sites said that having control over where their money goes was an important or very important factor behind their decision to use P2P. Nearly half wanted to actively support the SME sector, and 34% wanted to lend to industries they know or care about. Traditional banks offer no information or control on where our savings go, but there are, of course, values banks like Triodos, Charity Bank or Ecology Building Society that do just that.
Diversity of business models in the saving and lending sector is also crucially important. The UK not only has the most concentrated banking sector in the developed world, but the vast majority are plcs with interests devoted to increasing shareholder value only. The rest of the world has far more co-operative banks, mutuals, local banks and community finance institutions. The CMA must also look at these factors.
Open up the payment system
When it comes to personal accounts the dominance of the big banks in the current account market is the most serious problem. Discussion over this issue often comes back to whether ‘free’ banking model used in the UK is a viable way to run the market. Whilst this is important, the most fundamental barrier to new entrants in the current account market is the ownership structure of the payments system. Cheque clearing, faster payments, BACS and cashpoint machines are the plumbing of the finance system. No new bank can offer a current account without access to this system, and it is currently owned by the big banks. The fees for getting access are notoriously opaque and are consistently cited by those trying to set up a new bank as the reason they cannot even start a business. In April 2015 a new Payment Services Regulator will open up in the UK with the powers to challenge the ownership of this oligopolistic system. Unless this particular issue is addressed then the CMA inquiry will be window dressing.