Competition and choice in retail banking - Treasury Contents

Written evidence submitted by Delta Economics


1.1  Delta Economics has been surveying the same panel of entrepreneurs in the UK since the late summer of 2008. They surveyed growth-oriented entrepreneurs who run young companies (2-10 years old) with turnovers of above £250,000. The sample size in 2008 was 1,800, this had fallen to 900.

1.2  Between 2008 and 2009, the average turnover of businesses in the survey dropped from £1.51 million to £1.23 million (or nearly 23%). Between 2009 and 2010 turnovers rose again to £1.58 million (or 31%).

1.3  The companies in the sample in 2010 are the ones that have survived the downturn. On average, they have invested £180,000 at start-up in their business. They will put in nearly 70% of that amount from their own money (or £126,000), often from their own savings. The remainder of the money comes from a variety of sources as illustrated in Figure 1.

Figure 1

Source of finance to start business Percentage of
Family and friends14.0
Private investors32.3
Credit cards0.7
Equity finance3.4
Small firms loan guarantee scheme (SFLGS) 2.0
Enterprise finance guarantee (EFG)2.1
Other government grants7.4
Other directors14.9

Source: Delta Economics, COGS 2010

1.4  These are the "survivor" companies who are set on a growth path and therefore may not have the same patterns of access to finance as a more general small business population, although access to SFLGS finance and VC finance is consistent with other surveys. What is remarkable, however, is how few companies use bank finance when starting up their business.

1.5  Just 15.8% of these companies are looking for finance now and this figure has not changed since 2009. This gives some credence to the view that demand for finance has slumped during the recession. 81.6% of those who are looking for finance now are looking for growth finance, 29.0% for working capital and 66.5% are looking for finance for investment.

1.6  Those who are looking for finance now are predominantly looking for finance from bank overdrafts (20.3%) or bank loans (57.6%).

1.7  85.2% of those who say they are not looking for finance now are not looking for finance because they say they have no need for it, as illustrated in Figure 2.

Figure 2

Reason for not looking for finance Percentage of
No need for finance85.2
No point in trying because banks aren't lending 20.5
Cost of finance too high19.8
Lending terms are too stringent22.6
Deterred by bank manager or other bank staff 8.4
Have the finance myself57.0

Source: Delta Economics, COGS 2010

The number of respondents answering that banks were not lending in 2009 was 17%, so this suggests that that there has been a slight increase in the numbers answering positively to this question.

1.8  Delta Economics has conducted in-depth interviews over the last two years with 150 entrepreneurs, financiers and business support professionals in the UK and beyond. The tightening of credit has been a feature of these discussions and, from the experiences of entrepreneurs in accessing finance and from financiers themselves, the automation of credit risk profiling along similar lines by providers of finance has limited the degree to which individual providers have leeway to make decisions other than on the basis of credit scores, proven track-record and confirmed future contracts. Smaller turnover businesses have been particularly affected as the margins in this segment are small, meaning that there are fewer providers who increasingly price for risk, which pushes up costs.


2.1  In 2008, 38% of founders looked to banks to provide their external finance that they were not providing themselves. The figure is 29% amongst the "survivor" companies in 2010. This highlights a significant point; that the banks are not necessarily the biggest or the best source of start-up finance. The survivor entrepreneurs sought a great variety of finance including private investors, other directors and family and friends. They were also prepared to take a financial risk themselves. It is a mistaken belief that banks will provide loans without collateral and/or some form of co-investment by the entrepreneur and this data points out just how substantial that risk is for the entrepreneur.

2.2  Inevitably, therefore, banks are not the most appropriate source for start-up finance where amounts are small and risks to the banks are high. This is a well-known fact—hence why the role of family, friends and private investors is so substantial at the start-up stage. However, there is some evidence to suggest that before the financial crisis a number of banks were less risk averse than others, providing more in terms of individual interpretation of business plans and less pricing for risk.

2.3  As the banks have merged and the credit environment has tightened, our qualitative research suggests that banks have gone over to credit risk profiling which is an automated process. The scope for providing differentiated services to start-up and growth businesses has become more limited. This means that the relationship manager's role in building a trust base to financing the business may have become more limited. Some 8.4% of those who have not accessed finance were deterred their bank manager from doing so, possibly because of the fact that the credit history or risk profile would mean that the finance application would be rejected. Our qualitative research also supports the suggestion that relationship managers themselves may have deterred smaller, riskier businesses from putting in applications for finance that are likely to be rejected.

2.4  Given that our sample was biased towards growth-oriented entrepreneurs, this is likely to be magnified across a general business population and would lead to a conclusion that banks are themselves limiting the numbers of applications that are turned down before they go through the process. As all banks are putting companies through the same credit assessments the extent to which a longer term trust relationship with a bank-manager can circumvent this process is limited.

2.5  Similarly, because of the risks in the growth business market, banks have tended to move away from the smaller turnover businesses because this is an unprofitable and vulnerable segment of the market.

2.6  The fact that entrepreneurs put in so much of their own resources into financing their businesses at the start-up phase means that they are inherently risk averse too. The number of people saying that they felt there was no point in going to banks because they were not lending increased between 2009 and 2010. More worryingly, 85% say they have no need for finance, yet our survey is of an exclusive group of growth-oriented founders of businesses. If they are not looking for money and say that they have the money themselves, this will limit the extent to which they can grow over the long term.


3.1  The evidence suggests that the systemic credit tightening is having a more profound effect on demand for and supply of finance to the small business sector. The concentration in the business banking sector is less important than the fact that all banks are using automated credit profiling processes which rely on external credit scores, risk profile and firm contracts, rather than pipeline and track record; criteria which are the same across the sector.

3.2  Lower turnover and younger businesses are proportionately riskier and prices for banking services to this sector have inevitably risen as banks increasingly price for risk. This is common across all the firms operating in this market. Again, this is a function of the market rather than a function of concentration.

3.3  The above two points mean that choice is limited to the small business; they cannot select on the basis of a personal relationship with a manager, because in the end this will not be as important as the tighter credit control systems across the sector in determining whether or not the business accesses finance.

February 2011

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