UK banks called to account while Irish seem to keep customers happy


The Competition Authority needs to be convinced about the choice the banking sector offers business. But customers seem less concerned, writes Siobhan Creaton, Finance Correspondent.

Britain's top bankers were in the dock before a Treasury Committee last week, facing charges of squeezing excessive profits from small business customers.

One, Royal Bank of Scotland (RBOS), has a sizeable share of the small business banking market in Ireland through its Ulster Bank subsidiary though no such allegations have been levelled here.

But the Irish Competition Authority is aware that the British operations of AIB, Bank of Ireland and National Australia Bank, which owns National Irish Bank, were named by its opposite number in the UK as being part of a "complex monopoly" that has restricted choice for small and medium businesses there.

According to Dr John Fingleton, chairman and director of corporate enforcement at the authority, it is monitoring developments in Britain and the Irish banking sector is on its list for further study. "We are definitely not wholly satisfied with the level of competition available," he said.

But the Republic's small and medium-sized business sector, never shy to publicise injustices against its members, is generally satisfied with competition within this segment of the banking industry.

In general, Ireland's small business sector does not voice the same gripes as its British counterparts.

The single biggest reason for its contentment is the requirement that financial institutions must inform the Director of Consumer Affairs of price changes and that the office has the power to block them, effectively controlling the prices charged to bank customers.

Research by the Small Firms Association concludes that the fees charged to small business customers in the Republic are just 52 per cent of those charged in Britain.

According to Mr Mark Fielding, chief executive of the Irish Small and Medium Enterprises Association (ISME), while the cost of bank charges has been contained, some remain very expensive.

One of the main problem areas is the high cost of transferring funds internationally. "In one case recently a member received a €170 payment from China which cost €30 for be transferred to Ireland and a further €50 from the customer here to receive the payment," Mr Fielding said.

Small business customers feel aggrieved also about surcharges levied by financial institutions where overdraft facilities are exceeded. This occurs mainly because of cash flow problems associated with delays in receiving payment for goods and services that can range from 60 to 120 days.

There have always been concerns that Irish financial institutions would seek to recoup profits lost as a result of controls which apply here by making it more expensive for businesses to borrow money.

SFA director Mr Pat Delaney says the margin charged on loans for small business customers are still on the high side and broadly similar to those applied in Britain. "Typically customers are being charged a margin of around 2 per cent over the cost of funds," he says.

Mr Fielding says start-up and relatively young companies can face even higher margins of 4 to 7 per cent.

Small companies are always at a disadvantage to larger ones when it comes to borrowing money. Banks charge a premium to reflect the higher risk associated with small businesses and profit substantially from this practice.

Price regulation is likely to be introduced in the UK as part of the response to the Treasury Committee's inquiry into the findings of the Competition Commission. That commission found the big four high street banks - RBOS, Barclays, HSBC and Lloyds TSB - made excessive profits of £725 million sterling (€1.2 billion) from small business customers over the past three years.

For their part, the banks refute the charge.

"I reject it completely. I do not know what excess profit means," Barclays chief executive, Mr Matthew Barrett, told the committee last week.

He said the underlying assumption was that any money made after costs and a 1 or 2 per cent margin was excess profit. If this was the case, 22 out of 38 industry sectors in the UK would be making excess profits.

The Treasury Commission is examining the issue two years after Mr Don Cruickshank, in an investigation for the British Treasury, found the four banks enjoyed a "complex monopoly" in the provision of banking services to small firms, holding a dominant 85 per cent market share.

The Irish Bankers' Federation, the industry body for the sector, examined his findings at that time and suggested that the different price control regime here offered reassurance to Irish small businesses that they were paying a fair price for bank services. The Irish market is only a fraction of the size of Britain's, with a few players dominating the business.

AIB and Bank of Ireland have the lion's share of the business - providing current accounts, loans and overdrafts. AIB is estimated to hold about 40 per cent of the current account market with Bank of Ireland at 35 per cent.

Ulster Bank has also captured a sizeable chunk of that market holding about 14 per cent of business current accounts. National Irish Bank and Permanent TSB have been making some inroads and each have a 5 per cent share of this market.

There is evidence of greater competition when it comes to providing loans and overdrafts to small business customers. AIB, Bank of Ireland and Ulster Bank are estimated to have about 60 per cent of this business with Anglo Irish Bank and Bank of Scotland each thought to have about 20 per cent.

Mr Delaney says the degree of competition for this type of business can best be gauged by the effort most of the banks will make to retain customers.

"Most of the banks say they will go to extreme lengths to hold on to their customers. They will weigh up how far they can go in this regard based on the status of that business and the value of that account to the bank. Judgments are based on that rather than offering a pan-business facility."

The SFA is increasing the pressure on banks to embrace the move in Britain to pay interest on current accounts. "Any bank that decides to introduce this would receive a very positive response," says Mr Delaney.

In the meantime, the British Chancellor of the Exchequer, Mr Gordon Brown, has gone one further, directing the four named British banks to give £3 billion sterling back to small business customers. For now there is no official call for the financial institutions to do the same here.