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Small Business Banking - UK - January 2011

This report examines the business banking market, concentrating on small businesses, but covering issues and trends that are relevant in the wider SME banking sector. It covers the various factors that influence the market, such as business start-ups and failures, as well as the key trends within the market itself.

  • The commercial lending sector will be boosted by the mounting pressureto increase support for small firms. Banks have already pledged tocreate a £1.5 billion Business Growth Fund.
  • The number of business current accounts grew by 2% in 2009, to 3.76million. This number is expected to continue to grow over the nextfive years, despite the difficult economic conditions.
  • There is a definite opportunity to upgrade some small firms, as ourresearch found that around a quarter of SMEs use an ordinary/personalcurrent account to manage their day-to-day finances.
  • Banks should become more community-orientated and engage with localfirms. While 43% of SMEs feel that their bank values their custom,only 27% think it really supports their business.
  • Although the large high street banks still dominate the market (thebig four have a 79% share of the market), smaller providers have madesignificant progress in recent years, especially Santander, albeithelped by its acquisition of A&L.
  • Business banking charges were found to be the main cause of complaintamongst customers, even long-term customers, highlighting anopportunity for banks to offer discounts on transaction charges as away of rewarding loyalty.

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Table of contents

  1. Issues in the Market

      • Key issues
        • Abbreviations
        • Future Opportunities

            • Taking a genuine interest in the business
              • Focusing on standard charges and rewarding loyal customers
              • Market in Brief

                • The market continues to grow despite the recession
                  • Figure 1: Number of small business accounts, by type, and deposit balances, 2000-10
                • Pressure on banks to increase lending
                  • Figure 2: New term lending to small businesses, October 2008-September 2010
                • The number of small businesses continues to grow
                  • A market with few alternatives
                    • The big five account for nine in ten business bank accounts…
                      • Figure 3: Business current account market share, November 2010
                    • …and also dominate when it comes to adspend
                      • The rise of online banking
                        • Figure 4: Number and percentage of small businesses using online banking facilities, 2003-09
                      • Three quarters of SMEs have a business current account
                        • Figure 5: Ownership of business current accounts, November 2010
                      • High levels of customer satisfaction…
                        • Figure 6: Attitudes towards business banking, November 2010
                      • …although business banking charges are an issue
                      • Internal Market Environment

                        • Key points
                          • Pressure on banks to increase lending to small businesses
                            • Figure 7: New term lending to small businesses, October 2008-September 2010
                          • Banks respond by pledging an additional £1.5 billion
                            • The launch of the Enterprise Finance Guarantee scheme
                              • Government support for small businesses
                                • Rising fees and charges
                                  • Current accounts are key to gaining main provider status
                                    • Figure 8: Range of banking services provided, by principal bank, 2010
                                  • Personal experience is a key factor in the SME market
                                    • Figure 9: The main reasons why SMEs chose bank for main business account, 2010
                                  • A stable market with limited switching activity…
                                    • Figure 10: Main motivations for switching principal banking provider, 2010
                                  • Regulation and investigations
                                    • CC Investigation 2002
                                      • OFT Review of Undertakings 2006
                                        • OFT Review of Barriers to Entry 2010
                                        • Broader Market Environment

                                          • Key points
                                            • Continued growth in the number of small businesses...
                                              • Figure 11: Number of small business enterprises and the share of all enterprises taken by small businesses, 2000-09
                                            • ...though large companies are better at generating capital
                                              • Figure 12: Turnover of small business enterprises and the share of all enterprises turnover taken by small businesses, 2000-09
                                            • Understanding the requirements of different businesses
                                              • Figure 13: Number of private sector small businesses, by industry sector and employee numbers, 2009
                                            • Corporate insolvencies have started to fall
                                              • Figure 14: Corporate insolvencies in England and Wales* (not seasonally adjusted), Q1 2005-Q3 2010
                                            • High lending margins in a low interest rate environment
                                              • Figure 15: UK Inter-bank, three-month rate+ and selected UK bank rates*, January 2001-November 2010
                                          • Competitive Context

                                            • Key points
                                              • Ordinary current accounts are the main alternative
                                                • Figure 16: How businesses manage their day-to-day finances, November 2010
                                              • SMEs increasingly using alternative sources of finance
                                                • Figure 17: Sources of finance used by small businesses, 2009
                                            • SWOT Analysis

                                                • Figure 18: Small business banking – SWOT analysis, 2011
                                            • Who’s Innovating?

                                              • Key points
                                                • Peer-to-peer lending for small businesses
                                                  • The launch of Aldermore
                                                    • Another potential new entrant to the SME lending sector
                                                      • HSBC launches iPhone banking for businesses
                                                        • A new payment system aimed at small businesses
                                                          • Barclays upgrades business customers to contactless cards
                                                          • Market Size and Forecast

                                                            • Key points
                                                              • The business current account market continues to grow
                                                                • Figure 19: Number of small business accounts, by type, and deposit balances, 2000-10
                                                              • The number of new customers has remained steady
                                                                • Figure 20: Number of new small business banking customers, Q1 2007-Q3 2010
                                                              • The decline in average balances has stabilised
                                                                • Figure 21: Average amount of money held in small business bank accounts*, 2000-09
                                                              • Overdraft borrowing has fallen during the recession
                                                                • Figure 22: Small business overdraft borrowing, 2000-09
                                                              • The total value of outstanding term loans continues to rise…
                                                                • Figure 23: Small business term lending and total lending, 2000-09
                                                              • …but new term lending has fallen substantially
                                                                • Figure 24: New term lending to small businesses, October 2008-September 2010
                                                              • Long-term loans have become more popular
                                                                • Figure 25: Breakdown of term loans, by length of term (amounts outstanding, £bn), 2000-09
                                                              • Forecast
                                                                • The number of current accounts will continue to rise…
                                                                  • Figure 26: Forecast of the number of small business current accounts, 2005-15
                                                                • …as will the value of deposit balances
                                                                  • Figure 27: Forecast of the value of small business deposit balances*, 2005-15
                                                                • Forecast data
                                                                  • Figure 28: Forecast of the number of small business current and deposit accounts, 2005-15
                                                                  • Figure 29: Forecast of the value of small business deposit balances*, 2005-15
                                                                • Forecast methodology
                                                                • Market Share

                                                                  • Key points
                                                                    • The large high street banks dominate the sector…
                                                                      • Figure 30: Business current account market share, November 2010
                                                                    • …a trend supported by OFT data
                                                                      • Figure 31: Principal business banking relationship market share, 2010
                                                                  • Companies and Products

                                                                    • Barclays
                                                                        • Figure 32: Business current accounts provided by Barclays, November 2010
                                                                        • Figure 33: Barclays Bank plc annual results – UK Retail Banking division, 2008 and 2009
                                                                      • HSBC
                                                                          • Figure 34: Business current accounts provided by HSBC, November 2010
                                                                          • Figure 35: HSBC Bank plc annual results – UK Retail Banking division, 2008 and 2009
                                                                        • Lloyds Banking Group
                                                                            • Figure 36: Business current accounts provided by Lloyds Banking Group, November 2010
                                                                            • Figure 37: Lloyds Banking Group plc annual results – Wholesale division, 2008 and 2009
                                                                          • RBS Group
                                                                              • Figure 38: Business current accounts provided by RBS and NatWest, November 2010
                                                                              • Figure 39: RBS Group plc annual results – UK Corporate division, 2008 and 2009
                                                                            • Santander
                                                                                • Figure 40: Business current accounts provided by Santander, November 2010
                                                                                • Figure 41: Santander UK plc annual results – Retail Banking division, 2008 and 2009
                                                                            • Brand Communication and Promotion

                                                                              • Key points
                                                                                • Total sector adspend has held up relatively well…
                                                                                  • Figure 42: Advertising expenditure on select business banking services, 2007/08-2009/10
                                                                                • …with spending on business loans having actually increased
                                                                                  • Figure 43: Advertising expenditure on select business banking services, by sub-category, 2007/08-2009/10
                                                                                • The big four also dominate when it comes to advertising
                                                                                  • Figure 44: Advertising expenditure on select business banking services, by company (top ten), 2007/08-2009/10
                                                                              • Channels to Market

                                                                                • Key points
                                                                                  • The growth of online banking…
                                                                                    • Figure 45: Number and percentage of small businesses using online banking facilities, 2003-09
                                                                                  • …though branch access is still important
                                                                                  • Product Ownership and Choice of Provider

                                                                                    • Key points
                                                                                      • Three quarters of SMEs have a business current account
                                                                                        • Figure 46: Ownership of business current accounts, November 2010
                                                                                      • NatWest is the leading individual brand
                                                                                        • Figure 47: Business current account provider, November 2010
                                                                                    • Customer Loyalty and Satisfaction

                                                                                      • Key points
                                                                                        • A market with high levels of customer loyalty…
                                                                                          • Figure 48: Length of time with current provider, November 2010
                                                                                        • …and low levels of switching
                                                                                          • Figure 49: Time when SMEs started banking with their principal banking provider, 2010
                                                                                        • Different findings in terms of customer satisfaction
                                                                                          • Figure 50: Level of satisfaction with current principal banking provider, 2010
                                                                                      • Attitudes towards Business Banking

                                                                                        • Key points
                                                                                          • Over half of SMEs are satisfied with their bank
                                                                                            • Figure 51: Attitudes towards business banking, November 2010
                                                                                          • Access to credit only a problem for a minority
                                                                                            • Business current account customers are generally happier
                                                                                              • Figure 52: Customer satisfaction and attitudes towards business banking, by ownership of business bank accounts, November 2010
                                                                                            • Banks could do more to reward their loyal customers
                                                                                              • Figure 53: Attitudes towards business banking, by length of time with current provider, November 2010
                                                                                          • Appealing Benefits of Accounts

                                                                                            • Key points
                                                                                              • Lower transaction charges…yes please!
                                                                                                • Figure 54: Appealing benefits of business current accounts, November 2010
                                                                                              • A different approach for start-ups
                                                                                                • Figure 55: Appealing benefits of business current accounts, by product ownership, November 2010
                                                                                              • New customers like the idea of free banking for start-ups
                                                                                                • Figure 56: Appealing benefits of business current accounts, by length of time with current provider, November 2010
                                                                                              • Account charges are the key battleground for switchers
                                                                                                • Figure 57: Appealing benefits of business current accounts, by agreement with statements on business banking, November 2010
                                                                                            • Targeting Opportunities

                                                                                              • Key points
                                                                                                • Loyal SMEs represent the perfect customer
                                                                                                  • Figure 58: Attitudes towards business banking, by target group, November 2010
                                                                                                • Are established firms more likely to switch?
                                                                                                  • Figure 59: Length of time with current provider, by target group, November 2010
                                                                                                • Loyal SMEs appear to be almost impossible to steal
                                                                                                  • Figure 60: Appealing benefits of business current accounts, by target group, November 2010
                                                                                              • Appendix – Broader Market Environment

                                                                                                  • Figure 61: Breakdown of small business turnover and number of enterprises, by employee numbers, 2009
                                                                                                  • Figure 62: Number of enterprises, turnover and GDP, at current and constant 2005 prices, 2000-09
                                                                                              • Appendix – Forecast Data

                                                                                                  • Figure 63: Forecast of the number of small business current accounts, 2010-15
                                                                                                  • Figure 64: Forecast of the number of small business deposit accounts, 2010-15
                                                                                                  • Figure 65: Forecast of the value of small business deposit balances*, 2010-15
                                                                                              • Appendix – SME Research Respondents

                                                                                                  • Figure 66: Current company/organisation's business type, November 2010
                                                                                                  • Figure 67: Role in the company, November 2010
                                                                                                  • Figure 68: Number of employees in the organisation, November 2010

                                                                                              Companies Covered

                                                                                              • Abbey
                                                                                              • Alliance & Leicester
                                                                                              • Allied Irish Bank
                                                                                              • Bank of England
                                                                                              • Bank of Ireland
                                                                                              • Barclays Bank plc
                                                                                              • Bradford & Bingley plc
                                                                                              • British Bankers' Association (BBA)
                                                                                              • British Broadcasting Corporation (BBC)
                                                                                              • Clydesdale Bank
                                                                                              • Direct Line Group Limited
                                                                                              • Federation of Small Businesses
                                                                                              • Financial Services Authority (The)
                                                                                              • Grupo Santander Central Hispano S.A.
                                                                                              • HBOS plc (Halifax Bank of Scotland)
                                                                                              • HSBC Private Bank (UK) Limited
                                                                                              • Lloyds Banking Group
                                                                                              • Metro Bank
                                                                                              • Morgan Stanley & Co International Ltd
                                                                                              • Nationwide Building Society
                                                                                              • NatWest
                                                                                              • Office of Fair Trading
                                                                                              • Post Office Limited
                                                                                              • Royal Bank of Scotland Group plc
                                                                                              • Société Générale Group
                                                                                              • Tesco Personal Finance Limited
                                                                                              • Ulster Bank Ltd

                                                                                              Small Business Banking - UK - January 2011

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