HBoS targets small business market

HBoS, the UK's fifth-largest bank, yesterday launched its long-awaited bid to shake up the market for small business banking services, promising to pay interest on credit balances in business current accounts. However, its rivals refused to engage in battle.

The move comes just weeks before the Government is due to outline measures aimed at boosting competitiveness in the market, 83 per cent of which is controlled by Royal Bank of Scotland, Barclays, Lloyds TSB and HSBC. Breaking the stranglehold of the so-called Big Four was cited as a key rationale for the merger of Bank of Scotland and Halifax, completed in September.

While the incumbents pay no interest on business current accounts, customers of the Halifax and BoS will enjoy rates of 2 percentage points below base rate. The policy will cost HBOS £29m, including £20m for re-pricing the accounts of BoS's 100,000 business customers. Halifax is expected to open its maiden small business banking account in January.

George Mitchell, managing director of BoS, said that HBOS was targeting the 70 per cent of business banking customers who did not have overdrafts, although it would also provide borrowing facilities. "We are going to make life difficult for the Big Four. Our charges will definitely not be more than theirs," he said.

The Federation of Small Businesses rejoiced, but HBOS's battlecry met with disdain from the Big Four. They would lose £600m from a successful assault on the £30bn of cash held in their business current accounts.

RBS, the largest player in the market, said it had no immediate plans to respond in kind. Barclays appropriated the development as evidence in support of its longstanding claim that the small business banking market is highly competitive. "I cannot give customers the assurance that we will pay interest on current accounts," said a Barclays spokesman.

Lloyds and HSBC said they were considering whether to follow HBOS. "We're not just going to jump on bandwagon," Lloyds said. Abbey National, however, said it would align itself with HBOS.

HBOS is seeking to double its share of the market from 3 per cent to 6 per cent within three years. However, City analysts were fearful for the cost of HBOS's ambitions to its profits, although the shares closed up 38p at 845p. "Abbey is offering a competitive current account to small businesses and that's had a negligible effect on the market," said Robin Down, banking analyst at Morgan Stanley.

The Department of Trade and Industry is due to report on 28 December.