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Big banks make business difficult for SMEs | Allica Bank | Picture of a closed bank building
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Big banks make business difficult for SMEs

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With SMEs struggling to get the banking services they need, Allica Bank’s Conrad Ford highlights the need for a more flexible solution than big banks currently offer. 

1st Aug 2023
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Many accountants will have experience of how dealing with big banks can be difficult for SMEs, which can be caught out by not being big enough for corporate banking, but too big or complex for consumer banking. 

We spoke with Conrad Ford, chief product and strategy officer at Allica Bank to find out what issues this can cause and why.

As a relatively new entrant to the banking space and focusing on SMEs for lending and business bank accounts, Ford explained that there are a number of concerns they hear about frequently from accountants in practice.

“The dominant narrative from accountants around big banks, certainly for the past 15 years I’ve been in the industry, has always been about lending, with accountants saying that banks won’t lend to their customers, or they won’t give a straight answer.

“But recently we’ve seen a new concern, which professional accountancy bodies have also confirmed to us, which is businesses finding it very hard to open current accounts, or worse, being told by their current bank that they will be closing their account with very little notice. And of course, we’re all aware that not having a current account is a fairly existential threat for any business.”

The reasons for banks refusing a new account or closing an existing account are not always clear. Banks don’t always need to give a reason but even when dealing with clients that are not in high-risk industries or countries, it seems accountants and businesses are having difficulty with bigger banks.

Ford said: “A good accountant knows full well if a business is trustworthy and reliable, and they are struggling with the question of why so many of the big high-street banks are shutting down accounts or refusing to open accounts.”

SMEs struggling to get banking services

At the heart of this is the challenges that medium-sized businesses or established SMEs have with big banks. And that is that the big banks really struggle from an operational and efficiency perspective with the SME segment. 

“Banks actually find really small micro businesses easy to deal with and that’s easy to explain in this context, which is particularly around Know Your Customer (KYC) or anti-money laundering (AML) rules,” said Ford.

“Micro businesses are typically very simple from an AML perspective. Usually, it’s one or two people, they are almost overwhelmingly UK-focused and you can actually put the KYC and AML checks through a consumer AML platform. These days, the big banks have managed to automate that and make that very slick.

“Medium-sized businesses are more complex. Particularly, when you begin to look at the things that you need to look at for AML or KYC purposes. They’ll typically have multiple directors and multiple shareholders. Sometimes their shareholders are businesses, and sometimes those shareholders are overseas businesses or overseas individuals. Immediately, you begin to get into the kind of amber alert in a KYC process, or what in banking terms, you’d call enhanced due diligence.

“When you’re looking at a new customer – and this would be true of high-net-worth individuals as much as medium-sized businesses – you have your standard customer due diligence and then you have enhanced due diligence. And unfortunately, with big banks their operational processes are very inefficient for dealing with enhanced due diligence. 

“So in the end, the reason that we’re seeing lots and lots of perfectly good businesses being turned down by the banks for current accounts is because they have that extra complexity or nuance that ends up being an operational headache. Big banks have to do their processing and checks at scale and, in the end, it often feels as if they just can’t be bothered because the cost does not justify the outcome for them.”

Account closures are increasing

That doesn’t answer the question of why lots of businesses have suddenly received letters from their bank in recent months about account closures. This can be a very distressing experience for businesses and the accountants that work with them. Accountants are probably the first port of call for these clients once they receive these letters, to see if they can do anything to help. These businesses have typically been banking with the same bank for a long time. So surely there shouldn’t be any KYC or AML issues?

Ford said this is because “some of the major banks have discovered that their day-one due diligence was inadequate or, probably more commonly, that the ongoing monitoring of their due diligence has not been adequate”.

“They may have initially done due diligence on the business when it was smaller and simpler and now it may have new shareholders and new directors and the bank may not have done adequate due diligence as a result of those changes. This has really become starkly clear to some of those banks in recent times and led to reviews of their customer base.”

Ford added: “Unfortunately, this has led to many businesses that have had long-term relationships with their banks facing reviews and account closures. If a big bank has to completely redo the due diligence for a business – even though they’ve banked with them for five, 10, or 15 years – they may simply decide to close the account instead. It’s just as painful from the bank’s perspective to effectively re-onboard them as it is to onboard a new client.

“For years we’ve seen big banks struggle to lend to medium-sized businesses because they’re too small or low value for corporate banking where you can throw lots of high-quality people in suits at the problem. But they’re also too complex for consumer banking or micro business banking platforms.

“We’re now seeing that the big banks are deciding not to open new accounts with them or close existing accounts. They look at their spreadsheets and forecasts and they decide it’s not worth the effort, and that’s the heart of this problem.”

Have you or any of your clients had a similar experience with a bank? Let us know in the comments below.

Allica Bank specialises in business bank accounts and lending for SMEs. Visit the website to find your relationship manager and speak to them about how your clients might be able to benefit from their expertise and services.

Replies (8)

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By Hugo Fair
01st Aug 2023 23:44

I've no idea if Allica Bank are different (since I've never heard of them), but the elephant in the room isn't KYC/AML/PEP/etc ... it lies in the model (particularly since the last banking crisis) adopted for how banks operate and make their profits.

Without developing a full thesis here, the days of banks being able to turn a profit (or at least one that is acceptable to them) from retail banking are disappearing over the horizon ... along with the hated (by them) personal bank account which is almost as much of an anathema as retaining branch offices.

Once they decided that their purpose was to be providers of 'financial services', ordinary 'banking' became a historical embarrassment to them ... and seems, at best, to be regarded as a loss leader that only makes sense if account holder goes on to borrow and/or to purchase some financial 'products'!

No-one yet seems to have worked out how to provide a service akin to the old (pre-conversion) Bldg Socs where the majority of your transactions are entrusting your cash/savings to them and then withdrawing chunks on demand.
There was a brief period when it seemed that Revolut and some others had worked this out, but it's all gone quiet on that front recently ... so how do Allica fit in?

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Replying to Hugo Fair:
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By johnjenkins
02nd Aug 2023 13:07

Hugo, you hit the nail on the head. I suspect, though, that the Farage bandwagon has started and there will be all sorts of things coming out of the woodwork. Time for banks to go back to what they should be doing but I fear the profit margin they want isn't there.

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Replying to Hugo Fair:
paddle steamer
By DJKL
02nd Aug 2023 20:27

Hampden Bank in Edinburgh offer that service, current accounts, loans , call/term deposits, credit cards, insurance via Hiscox- I am not sure they actually offer anything else.

Yes they are picky re size of client (minimum x liquid funds etc) but they offer a service that is excellent, calls and e mails direct to your named contact, voice messages returned etc etc

I have dealt with them for a good few years now and the hours of time I save compared with say Clydesdale/Virgin ,where we also have a couple of legacy accounts, is pretty large. (In fact with no named business relationship manager at Clydesdale/Virgin I try to never call them)

https://www.hampdenandco.com/

They are effectively Adam & Co from years long gone without the frills or RBOS.

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Replying to DJKL:
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By Hugo Fair
03rd Aug 2023 18:59

I'm not usually a sucker for marketing hooks, but I like their:
"It's a highly personal form of banking designed for those who want the simple things done well, and the complicated things done simply."
... could've been written specifically for me!

Mind you, despite the clever branding, I see they're both young and small ... so they ought to still have the customer focus. Time will tell, now that they're turning a profit, whether they can avoid the temptation to become greedy.

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Replying to Hugo Fair:
paddle steamer
By DJKL
03rd Aug 2023 19:22

The ethos is good, they were created by Ray Entwhistle (and others) who we knew from his Adam & Co days (we previously did some banking with them)

Yes, small, so thoughts on solvency of course arise, but their very vanilla banking process reassures me that their balance sheet is likely as it appears with no ABN Ambro horrors that RBOS experienced with Fred the Shred.

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By ArianBloodwood
02nd Aug 2023 12:31

Hugo I agree with the point you raise: that banks are now primarily profit-oriented whereas in the past they were focused on being a service-provider.

But I think there's another issue in play here too: the gradual tightening of the requirements of AML, and how AML is being implemented.

I think we agree that economic players need to be regulated, and hence anyone entering the field of economic activity needs to show they are acceptable players. But meeting AML requirements is a cost because it takes time, skill and other resources, both by gatekeepers such as banks and accountants and by the prospective players themselves. The question of how that cost is born or who bears it has not been adequately addressed.

Allica Bank's Conrad Ford implies that banks are willing to bear some minimal cost but beyond that they simply won't accept the client. Us accountants are in discussion about how much cost to absorb ourselves and whether, when and how to pass on those costs to clients.

Not only medium enterprises lose access to services. Recent media reports highlight how politicians can also lose access. Other media reports and my own experience in my practice show that socially marginalised groups also lose access to vital financial services - not because they are unfit economic players but because the issue of costs of the AML system has not been adequately addressed.

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By Halex
02nd Aug 2023 14:17

Even worse if you are running a charity where you may have 10+ trustees. Banks are happy to sit on vast amounts of charity cash paying out less than 0.5% interest and then putting a block on the account if they don't see all trustees in a bank branch at the same time with all their paperwork.

The simple solution would be for the banks to go back to charging everyone , individuals included, a reasonable service fee to cover the cost of the services provided. In the meantime a long hard look at the KYC/ AML regime would benefit all before the commercial world simply grinds to a halt through ineffective overregulation.

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Replying to Halex:
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By johnjenkins
02nd Aug 2023 15:26

Considering AML is an EU thing, perhaps it's time it was amended to suite the UK not the EU.

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