Lack of bank competition denies small firms capital

Competition report: The failure of the larger banks to pass on interest rate reductions on working capital loans is costing small business up to €85 million a year. The figure, contained in a special report on the banking sector commissioned by the Competition Authority provoked an angry response from the small business lobby yesterday.

The director of the Small Firms Association, Mr Pat Delaney, said the report "highlights the need for greater competition in the provision of working capital for small business".

But he added that it "fails dismally to come up with any answers as to how the situation might be remedied".

His sentiments were echoed by ISME, whose chief executive Mr Mark Fielding said that the study showed that small and medium enterprises suffer disproportionately compared to big business.

"However, it patently fails to introduce the adequate recommendations to ensure a comprehensive competitive banking environment."

The report, by LECG consultants, is the latest phase in a two-year investigation by the Competition Authority. It contains 40 recommendations on ways to improve competition.

The authority will now commence a consultative process before drawing up its own recommendations in the first half of 2005.

The chairman of the authority, Dr John Fingleton, said that the final recommendations would take into account any errors brought to the authority's attention and any unforeseen negative consequences of the proposed actions.

The authority decided to focus on two areas - personal current accounts and lending to small business - because of "their fundamental importance to the relationship between banks and their customers". It also examined the clearing system which is an "essential input into producing a competitive current account product.

The report concluded that there was not enough competition on personal current accounts in Ireland. AIB and Bank of Ireland have 70 per cent of the market between them.

They identified numerous obstacles to customers switching accounts and as a result becoming "locked in". These include the structure of the clearing system, price controls and government stamp duty on plastic cards.

It recommends that the Irish Banking Federation's recently proposed code on account switching be revised to allow account switching within 3 days rather than the planned 7 days. They also called for an end to controls on bank charges arguing that they make it harder for new entrants to compete.

It also argues that new entrants to the market need timely access to the payment clearing service by which the banks move money around.

It highlights the lack of clear procedures for joining the existing systems and recommends the establishment of a centralised hub or automated clearing house.

The consultants argue that there is little competition in the small business working capital market and that existing banks are exercising market power in their dealings with small business.

The report concluded that the barriers to new entrants in the business lending market are similar to those faced in the personal current account market. It makes a number of recommendations to facilitate switching.