Banks 'costing small firms €85m a year'

Small businesses are losing around €85m a year as banks hold back the benefits of interest rate cuts, a leading watchdog claimed today.

With thousands of consumers swapping banks to avoid high charges, the Competition Authority warned that firms were suffering as finance houses refused to offer them the best deals available.

A report from the body revealed small companies were not benefiting from competition particularly when it came to borrowing money.

And it stated banks are not passing on interest rate cuts to their Small and Medium Enterprises customers costing them €85m a year

The body noted that Bank of Ireland and Allied Irish Bank have 70% of the personal banking market and that showed a lack of competition.

Figures from the Irish Bankers Federation revealed around 10,000 people have moved to a different bank under the account switching code brought in to eliminate the hassle associated with transferring direct debits and standing orders.

John Fingleton, chairman of the Authority, said highlighting the lack of competition would have a significant impact on the industry, and change was expected.

“Competition should make financial institutions more responsive to the needs of Irish customers,” he said.

“The Competition Authority has identified a number of areas where competition is not allowed to develop freely and unencumbered and we have made appropriate recommendations.

"These recommendations will have a significant impact, and will have knock-on effects in other areas of banking.”

The report noted that while some changes had been made in improving services and access banks still had a lot more to do to improve competition.

It called for financial institutions to make it easier for personal customers and businesses to move their bank accounts, make it cheaper for small business to access working capital and make it easier for new banks to offer services to Irish customers.

It stated that the regulation of bank charges should not be removed until competition improves.

The body warned that customers with a personal current account are effectively locked in to one bank, making it difficult to change banks.

Consequently it stated banks do not compete for existing account holders but fight aggressively for customers opening accounts for the first time, for example college students.

The Authority, in its final report on the banking industry, makes 25 recommendations to increase competition. But it notes steps have been made to improve the sector.

Among the 25 changes the body called for:

:: Improvements to the switching code for personal current accounts and end double taxation of plastic cards – both of which have begun.

:: Standardise acceptable forms of identification.

:: Provide personal current account interest rate information and promote personal current account interest rate awareness.

:: Implement an Effective Switching Code for small businesses and make it easier to compare current accounts.

:: Facilitate easier transfer of mortgages.

:: Clarify the status of An Post and credit unions in the payments industry.