By Scott Wright

SMALL firms in Scotland have welcomed an increase in competition in the retail banking market since 2018, but warn progress risks being thrown off course by the focus placed by major banks on emergency lending during the Covid-19 crisis.

The Financial Conduct Authority (FCA) declared yesterday that greater competition in retail banking is driving choice and lower prices for consumers and small businesses, despite the impact of the pandemic.

In an update to its 2018 review of retail banking, the City watchdog said the large banks’ historic advantages remain strong. However, it said these advantages are starting to weaken because of digital innovation and changing consumer behaviour, adding that persistently low interest rates are constraining banks’ financial returns.

Its review also found that the share of personal and micro-business current accounts held by digital challengers rose between 2020 and 2021 while the large banks saw their share fall – even though large lenders lent proportionately more to micro-businesses during the pandemic.

Digital innovations by banks and their customers, which accelerated during the crisis, were also found to have improved service quality and satisfaction, notably for mobile and app users.

However, concerns have grown in recent months over reducing access to cash and branch services, as major banks have continued to slash branch numbers amid the pandemic.

Asked to comment on the update to the review, Colin Borland, director of devolved nations at the Federation of Small Businesses, told The Herald: “It has been pleasing to see increased competition in the small business banking market in the UK. However concentration of government-backed emergency lending within the biggest banks during the last two years threatens to derail some of this progress.

“Use of cash obviously took a big hit over the last years, but it is FSB’s view that we need to secure its future.

“That will require the banks, the regulators, and government all to play their part. It can’t just be about placing new duties on retailers who are already under pressure on this front as a consequence of bank branch and ATM closures.”

Kate Collyer, chief economist at the FCA, said: “Competitive pressures and innovation are starting to deliver for retail banking customers, with greater choice, lower prices and more convenient ways to bank.

“But changes that may benefit many of us can also be a risk to those in vulnerable circumstances, which is why we have put in place guidance on the closure of branches and ATMs. We are also consulting on a new consumer duty to set higher expectations for the standard of care that firms provide.

“Our research clearly shows the impact of the measures we took to reform the overdraft market and protect those financially affected by Covid.”