UK bank services for small business: how competitive is the market?

Citation

(2007), "UK bank services for small business: how competitive is the market?", Strategic Direction, Vol. 23 No. 6. https://doi.org/10.1108/sd.2007.05623fad.009

UK bank services for small business: how competitive is the market?

UK bank services for small business: how competitive is the market?

Heffernan S. Journal of Banking & Finance, November 2006, Vol. 30 No. 11, Start page: 3087, No. of pages: 24

Purpose – to interpret the pricing strategy of UK banks lending to small- to medium-sized enterprises (SMEs). Design/methodology/approach – develops an econometric model of bank pricing (Heffernan 2002) and applies to interest rates attached to UK business investment accounts, business current accounts, company mortgages and business loans from March 1996 to December 2001, by 88 financial institutions. Extends the Klein (1971) and Monti (1972) theory of monopolistic banking by using LIBOR instead of bank rate, and adding branches as well as bank charges. Separates products offered into bargains and rip-offs. Findings – finds that providers behave as a complex oligopoly, and that some provide good value while others charge heavily. Finds heterogeneous pricing behaviour, as well as Cournot competition for some products, accompanied by monopolistic competition. Shows that the four largest banks are not the only ones to charge higher rates (though they now pay interest on current accounts), while higher fees are associated with higher rates for several institutions. Research limitations/implications – admits there are omitted but significant non-price characteristics. Practical implications – confirms the need to reduce the complexity of bank charges, to encourage SMEs to change bank without having to open a current account first, and to allow use of cash machines to other banks’ customers. Originality/value – demonstrates that some, but not much, progress has been made in making SME banking more competitive.

Keywords: Banks, Competition, Fees, Oligopolies, Small to medium-sized enterprises, United Kingdom