Lloyds TSB to pay interest to small firms at a cost of £100m

Lloyds TSB yesterday became the first of the Big Four banks to give details of how it would improve its services to small business customers, pledging to pay 1.5 per cent interest on current accounts from 10 December.

The move follows a stinging report by the Competition Commission in March that accused Lloyds, Barclays, Royal Bank of Scotland and HSBC of operating a complex monopoly in England and Wales and not giving small business customers a fair deal.

The report, endorsed by the Government, said the Big Four must start paying interest on business current accounts or scrap charges for services such as cheque cashing.

Lloyds, run by the chief executive Peter Ellwood, has opted for paying interest, pledging to peg it at 2.5 per cent below the Bank of England's base rate, meaning many of its 560,000 small business customers will get a more generous deal than private customers, most of whom receive 0.1 per cent interest on current accounts.

Lloyds estimates paying interest to business customers will cost £100m a year. Those who benefit from the deal will be UK companies with turnover of up to £25m, which was the commission's definition of a small or medium-sized enterprise.

Following the moves of other big banks in recent weeks, Lloyds also announced measures to make other services more competitive. It is boosting interest on business deposit accounts to the same level as business current accounts, up from as low as 0.5 per cent.

Lloyds has also decided to slash some of its charges to small businesses – an area denounced by the commission for being unfair to these customers. Lloyds is bringing down some of these charges, such as payments over the internet, by more than half.

Lloyds' competitors are yet to make public whether they will opt for credit interest or scrapping fees. They have to make the change by January next year and have been criticised for dragging their heels.

Most are expected to go for interest payments because it will create less of a dent in profits than getting rid of the lucrative fees the Big Four charge for services. The financial hit is still expected to be considerable, with HSBC – the smallest market share of the Big Four – expecting it will cost it £80m a year.