COLUMN: EU tilt at UK small-business loan market a tall order: Alexander Smith

October 6, 2009

A customer uses a Royal Bank of Scotland (RBS) cash machine in Edinburgh, Scotland August 7, 2009.  Royal Bank of Scotland reported more losses on Friday as investment banking profits failed to offset bad debts and the state-owned lender warned of more "poor" results to come before its own and the economy's recovery.    REUTERS/David Moir    (BRITAIN BUSINESS BANKING)— Alexander Smith is a Reuters columnist. The opinions expressed are his own –

By Alexander Smith
LONDON, Oct 6 (Reuters) РIf Brussels is really planning to force Royal Bank of Scotland  and Lloyds Banking Group to give up small business customers as part of the price for state aid they have received, it will be trying to break a cartel which has persisted despite the best efforts of the British government.

According to an article in the Times newspaper, the European Commission wants RBS to jettison up to 10 percent of these customers. If true, that would mean RBS ditching up to 110,000 of its 1.1 million British clients — those with a turnover of less than 1 million pounds ($1.6 million) — who together give the bank a market share of around a third.

However, even using the state aid lever it is going to be tough for Brussels to engineer a fundamental change in the British banking landscape, where the “big four” of RBS, Lloyds, Barclays and HSBC exert a vice-like grip on the branch-intensive deposit taking and cash management services required by small and medium-sized businesses (SMEs).

Even if RBS is forced to give up 10 percent of its market share, this would only equate to 3 percent of the total. Throw in some of Lloyds’ customers and you might get to 5 percent.

That might just about be enough critical mass for a player such as Abbey — part of Spain’s Santander — or perhaps even Tesco, a retail giant with banking ambitions, to establish themselves as a credible alternative to the big guns, whose high street dominance and often long-standing local relationships have kept others out of this lucrative market. But probably not more than one.

But who would decide which parts of the business would be hived off, and to whom? Arbitrary decisions would cause huge problems for customers, if only due to a change in location of the branch with which they had most dealings. There would also be a temptation for RBS and Lloyds to cherry-pick their worst customers and offload them onto another bank.

In any case, a small-scale redistribution of market share would be unlikely to bring about a fundamental change to the way banks charge for their services to small businesses or the level of fees they are able to extract for everything from the use of a night safe to money transfers.

Organisations such as the Federation of Small Businesses have been complaining about such things for some time. The March 2000 Banking Review by Don Cruickshank found deep competition concerns in the SME banking segment, citing high barriers to entry and high profits and prices. Cruickshank’s solution was to call for pricing transparency but no restrictions, and to recommend a full Competition Commission monopoly referral to consider structural remedies as well as behavioural ones. But if anything the concentration highlighted by Cruickshank has intensified in the intervening years as the banks have merged with one another.

While it would be welcome news if Brussels was finally getting serious about shaking up the sector and breaking the grip of the big four, a half-hearted tilt at two of the players will do little more than satisfy the box tickers.
(Editing by David Evans)

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