Big banks make business difficult for SMEsby
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.
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.
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