Competition in SME loan market is suboptimal

The Netherlands Authority for Consumers and Markets (ACM) has concluded that competition in the market for SME (small and medium-sized enterprises) loans from banks is suboptimal, and has, in fact, decreased in the past few years. Only a limited number of banks is active in this market, there are high barriers to entry, and comparison-shopping SMEs or alternative sources of funding exert little competitive pressure. Chris Fonteijn, Chairman of the Board of ACM, adds: ‘In order to solve this problem, the government must stimulate the entry of new providers as well as the growth of alternative sources of funding. Furthermore, it is also important that banks are clearer about the interest rates that SMEs need to pay.’ ACM will launch a study into the possible introduction of bank account number portability when switching banks. Such an option could reduce the barrier to switch to a different bank.

Market for SME loans

Most of the loans to SMEs are taken out from the three major Dutch banks: ABN AMRO, ING and Rabobank. No other lenders are active that offer loans and lines of credit to SMEs on such a large scale. In addition, several foreign lenders have ceased operations in the Netherlands in recent years. As many SMEs rely on external funding for running their businesses, it is particularly important that there is sufficient competition in the market. A lack of competition could lead to higher funding costs for SMEs, worse service from banks, and less innovation.

ACM has established that the banks’ profit margins on SME loans have increased over the past few years. This is an indication of reduced competition in the market. One explanation is that banks are restricted in the amount of funds they are allowed to lend. As a result, they have less room to compete with one another. In addition, there is a risk that those three major banks tacitly coordinate their market behavior. Entry of new players will increase competition, reduce the ability to coordinate tacitly, and increase the size of the SME loan market. The high entry barriers, however, hinder such entry.

What solutions does ACM propose?

It is crucial that entry is promoted. ACM therefore calls on the government to implement the recommendations ACM had previously made concerning the reduction in the barriers to entry. In order to stimulate SMEs to comparison-shop more, banks must provide more information about key features of their loan products, and they must lower switching barriers. In the context of these switching barriers, ACM will launch a study into bank account number portability. Finally, in order to stimulate the growth of alternative sources of funding, it is essential that new and existing regulations and guarantee schemes do not have a restrictive effect.