Developments and Trends in SME Banking Services Since the Wallis Report

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Abstract

This paper reviews recent developments and trends in the accessibility, affordability, and efficiency of SME banking services. Competition in the financial sector is stifled with major banks dominating 80 to 90% of small business deposit and lending assets. Maintenance of the status quo suggests that small businesses are either satisfied with their overall banking arrangements or that the perceived benefits of switching provider do not outweigh the costs. While the cost of basic business banking account transactions has not decreased, the cost of basic business cheque transactions has decreased for small businesses adopting new technology telephone and Internet banking. Credit card merchant schemes are undergoing sweeping reforms in 2003. Relatively greater competition in the provision of small business debt finance is evident with some fees on individual loans having decreased since 1997. The weighted-average interest rate paid by small businesses over all types of variable-rate loans has decreased, despite an increase in margins. The impact of these findings on SMEs are summarised and recommendations for policy-makers are made in order to mitigate any adverse effects.

Introduction

There is considerable community concern that banks are generating increased revenues and profits through higher fees and charges on transaction account banking and other services provided to small medium enterprise (SME). The most recent inquiry into the financial system was completed in 1997 and reported its findings in the Financial System Inquiry Final Report (FSI) (1997). Also referred to as the Wallis Report, after its chairman Stan Wallis, the terms of reference of the report did not specifically mention SMEs, however they have been given due consideration in addressing the following terms:

* The effects of deregulation of the Campbell Report (1981) on the range, quality and cost of financial services available to consumers and other users;

* The development of the financial institutions and their products; and

* Regulatory arrangements affecting the operation of the financial system with regard to promoting the most efficient and cost effective services for users (FSI, 1997).

Since then, a number of other studies of the banking sector and the provision of services to SMEs have been conducted. This paper reviews recent developments and trends in the accessibility, affordability and efficiency of banking services from the time of the Financial...