Abbey National has announced plans to compete aggressively for a share of the market for small business bank accounts.

The move is a direct challenge to the 'Big Four' UK banks - Lloyds TSB, Barclays, HSBC, and Royal Bank of Scotland - who between them control 90% of the market for small business banking services.

Abbey National, unlike the Big Four, plans to pay interest on all small business current accounts that remain in credit.

The bank currently offers business banking services only to sole traders and two-person partnerships, but will begin targeting small and medium-sized enterprises (SMEs) in January 2002.

Competition intensifying

Abbey has previously said it aims to boost its share of the market for SME banking from 1% currently to 5% within five years.

"The small business banking market has been milked by the big four banks for far too long and this particular cash cow is due for slaughter," said Abbey's director of business banking Gary Hockley-Morley.

Abbey's new SME account will intensify the competitive pressure facing the Big Four banks.

Last week, the UK's fifth-largest bank HBOS also unveiled plans for interest-bearing SME current accounts.

HBOS, formed in September by a merger between Bank of Scotland and the Halifax building society, plans to pay interest at 2% below the UK base rate on all SME accounts that are �1 or more in credit.

Abbey has yet to announce the terms of its SME account.

Heavy criticism

The Big Four UK banks have come under heavy criticism in the past two years for operating a de facto cartel in the market for small business banking.

Last year, an independent report by former London Stock Exchange chief Don Cruickshank found that the Big Four banks offer broadly similar terms and conditions to their SME customers, providing little incentive to change accounts.

The Cruickshank report triggered a full investigation by the Competition Commission, the UK's anti-trust watchdog.

Earlier this year, a preliminary Competition Commission report cleared the Big Four banks of colluding to dominate the market, but found that they do exert monopoly power over small business banking.

The Commission completed its final report in October, but its findings have not yet been published.

In July, the government blocked a proposed merger between Lloyds TSB and Abbey National on the grounds that it would further restrict competition in the market for SME banking.