An insider’s view of business banking

Post GFC, Australian home owners have benefited from competition between the ‘Big 4’ banks which blew away their minor competitors and topped up their balance sheets with low capital consuming and safely profitable home loans.

Depositors have also benefited from competition between the big banks, which were caught out when offshore wholesale funding dried up and they had to rely more on local depositors for their funding.

But what about business customers? In recent weeks, the Big 4 have had a lot to say about introducing real competition into the business banking market. But will this actually lead to a similar level of competition as we now have in home loans and deposits markets?

Some of the current bank advertising has certainly got media analysts talking but the intended targets, Australia’s business owners, are a cynical lot when it comes to banks’ promises and won’t be easily swayed.

The recent initiatives by some banks to attract business customers include concessions like paying switching costs and nil establishment and account fees. But to the extent that this simply results in a business switching from one bank to another, it is a “nil sum game”. In fact, it could even be counterproductive for both the bank and the customer because swapping banks means the borrower’s track record (assuming it’s a good one) is lost. So the “banking merry-go-round” offers little long-term benefit for either party.

Businesses are not likely to switch just because the new bank will make the transfer cost neutral. They want something more. Some want increased limits to enable them to take advantage of growth opportunities now presenting themselves as we hopefully move into the post GFC period.

Others are looking for relaxation of loan covenants and the conditions available before they were tightened by the banks when the GFC hit. A simple and minor relaxation of a loan covenant could make all the difference in helping a business fund growth. Some businesses want nothing more than to be able to talk to someone about getting something simple done like establishing a bank guarantee for the lease of premises.

The Big 4 banks maintain that competition in business banking is intense and they each profess to have a unique value proposition. So why do they compete on the same relatively insignificant terms such as establishment fees and switching costs? The saving of a $10,000 establishment fee means very little relative to what an increase of $250,000 in an overdraft might do for a family business.

And if the competition is so intense, why do customers wait endlessly to get a phone call returned or for an answer on the most basic of queries? Yet despite being on the receiving end of what is in many cases appalling customer service, most customers just can’t be bothered to take their business elsewhere or even complain about the service.

The real reasons why more SMEs don’t change banks are as follows:

• It’s simply too hard. Even if a new bank will cover some of the financial costs of switching, the cost of time is an equally significant disincentive which can’t be mitigated by financial incentives.
• Hand in hand with this is the widely held perception that the Big 4 are all the same. Or as one disgruntled business owner put it to me recently, when I asked how his new business bank was treating him: “Same *&%#, different bucket!”
• It’s not so much the bank but the banker who makes a difference to the relationship. When businesses do have a good relationship with their bank, it invariably coincides with a period where they are (surprise, surprise) very happy with their relationship manager. Problem is the relationship managers stay in their roles, on average, for about one year, the good ones get promoted too quickly and the customer is left with the task of “training up” the incoming relationship manager. A change of banker (for the better) can be as good as a change of bank without the hassle.

I have no doubt that the Big 4 banks are genuine in their desire to build better relationships with their business customers. However, currently a big gap exists between the banks, which like to see themselves as the ‘trusted advisor’ and their business customers, many of whom remain firm believers in the old adage that “the bank will take away the umbrella as soon as it looks like raining”.

Perhaps the banks need to set more realistic aspirational goals and focus on taking one step at a time in endeavouring to differentiate themselves from each other. One strategy that the banks could employ is to invest more in their overstretched and under resourced front line staff so they have an even chance of delivering on the promises the marketing people make on their behalf.

But if an SME wants a better relationship with their bank, they cannot and should not wait for the bank to take the initiative. Here are some tips to help SMEs build better relationships with their bank:

1. Perform. It’s so important to actually do what you say you will do, meet your agreed targets and your bank’s expectations.
2. Communicate. No surprises here! Bankers don’t like surprises. Ignore your bank at your peril. Don’t over promise and don’t surprise them. Keep communication channels open and make sure your bank knows what you and your business are all about.
3. Build relationships. Get to know as many people in your bank as possible including senior executives. You also must be willing to invest time and effort in educating new bankers about you and your business.
4. Understand what your bank wants. Learn the lingo. Find out about credit ratings, cost of capital, share of wallet and other drivers of bank behaviour in order to negotiate the best outcome.
5. Play nice. Be good to your bank and your bankers. You may win an occasional battle, but remember you will rarely win a war against a bank.

While business owners are encouraged to proactively work on the relationship with their bank, prudent risk management compels them not to become over-reliant. Steps a business can and should take to minimise their exposure to their bank include:

1. Don’t have all your banking eggs in one basket. If you are big enough, you should have at least two banks. If not, always ensure you keep in touch with a potential new bank in case of difficulties with the incumbent. A good way to do this is to stay in touch with bankers who go to other banks; a very common occurrence these days.
2. Try to avoid having the family home and personal guarantees as security. This is possible if your business case is sufficiently sound and robust.
3. Always have a Plan B for a rainy day. You can give yourself some leeway by:

• Paying down debt when you can.
• Maintaining headroom in facility limits and banking covenants.
• Maintaining or having access to a reserve fund or relatively liquid assets outside of the business for use in an emergency.

–Neil Slonim has 25 years’ experience in the banking sector and founded Slonim Consulting to provide support and advice to companies experiencing challenges with their banks.