More competition for SMB business loans among banks possible

The Netherlands Competition Authority (NMa) makes several recommendations to small and medium businesses (SMBs) and to banks for improving competition. These are the results after the completion of a competition law investigation into interest rates that Dutch banks charge SMBs when giving them business loans. The NMa did not establish any violation of the Dutch Competition Act.

These are the conclusions in the report entitled 'SMB lines of credit attached to business checking accounts' (for overdraft protection) that the NMa has published today. The SMB business loans market in the Netherlands is dominated by three major banks with a combined market share of 85 percent. Between 1990 and mid-2007, the base interest rate that is normally used with these kinds of loans, and that includes a fixed interest-rate surcharge, was the same at all three banks for all SMB customers. However, large businesses are not charged that surcharge.

Banks offer widely divergent reasons for this fixed interest-rate surcharge. The NMa believes this observed 'parallel' behavior among banks in that time period might be explained in part by the individual market power of banks vis-à-vis SMBs, resulting in SMBs being unable to negotiate lower tariffs because of their limited bargaining power. Another explanation might be oligopolistic behavior whereby banks implicitly mirror each other's behavior because of the limited number of providers and because the so-called base interest rate (a European interest rate plus the abovementioned fixed interest-rate surcharge) is published online and in newspapers. Though the NMa has observed that there have been differences in the base interest rate level since mid-2007, mostly because of the financial crisis, surcharges in base interest rates however have at the same time also increased.

There are a number of options to improve competition on this market, according to the NMa.

• Banks could provide more information on the various aspects of a loan application, such as formal requirements, how long it takes before a decision can be reasonably expected, as well as explaining why an application may be rejected. SMBs will thus be better able to compare banks.
• Also, banks could make it easier for their customers to switch banks by, for example, improving checking account number portability. However, that can only be done on a European level, and will not be realized in the short term.
• Furthermore, SMBs should more often look into whether it might be more economical to get their products and services from different banks rather than getting an all-in-one deal from a single bank.
• Finally, more SMBs should ask their banks for lines of credit attached to their business checking accounts (for overdraft protection) without a base interest rate, which includes a fixed interest rate.

The NMa will continue to monitor the SMB business loan market in the future.