Small businesses put up with abysmal service levels from their financial institutions, despite the fact almost half are dissatisfied with their banks.
The emergence of agile, creative fintechs that will fight for business from SMBs mean established banks could soon see their market share drastically reduced.
According to East & Partners’ October 2015 SME Transaction Banking Markets report, 24.5 per cent of SMEs (defined as businesses with between $1 million and $20 million annual turnover) have said the likelihood of changing their primary bank is either “definite or highly probable” in the next six months.
So what is stopping them?
However, their choices when it comes to switching are limited. As outlined in the Financial System Inquiry report small businesses do not have access to the alternative funding channels available to larger corporations, such as debt market funding. This makes them more dependent on bank credit and beholden to the major banks.
This is something all the banks understand – and it means they’re not working as hard as they should be for their small business customers.
In addition, the cost to switch banks makes changing financial institutions prohibitive. But at the same time, small businesses are also exposed to unreasonably high – and rising – fee structures, as well as onerous credit checks.
Nevertheless, until now, for most small businesses, the risk of switching financial institutions has been too great. Changing banks can be time-consuming and costly and the risk of encountering problems during the switch has been simply too high for small businesses that rely on their financial institution for cash flow and real time financial data.
Yet there are clear benefits to those businesses that do choose to switch financial institutions. According to the UK Competition Markets Authority’s report, Retail banking market investigation, released in October this year, heavy overdraft users, which are usually small businesses, could save the equivalent of $540 a year if they switched, while everyday bank customers could save $154 a year.
While the equivalent research is not available in Australia, it’s likely local small business bank customers could enjoy similar savings if they were prepared to switch financial institutions.
Many SMEs are dissatisfied with their banks
Importantly, according to East & Partners, only a tiny percentage of small business customers are satisfied with their bank.
Its data shows only 4.9 per cent are satisfied with their current bank and have not considered alternatives to their current financial institution. Conversely, when asked what’s preventing them from switching to a non-bank lender, a whopping 49.1 per cent said they are dissatisfied, but have not yet considered switching banks.
It’s safe to say this is largely because small businesses are so time poor, they are focusing on growing their business rather than deriving more value from the relationship they have with their financial institution.
On top of this, 53.6 per cent said the main factor that’s stopping them from switching to a non-bank lender is the fact they are using their home as collateral against their business loan. What this means is that until now, there has been little incentive for banks to up their game when it comes to their small business customers.
But that’s all about to change
The plethora of emerging fintech businesses are putting pressure on the established banks to genuinely meet the needs of their small business customers.
Small businesses want quick and easy access to credit, genuine choice when it comes to financial institutions and the same level of service afforded to bigger businesses.
If larger banks don’t start to meet these requirements they will see their market share eroded by nimble, hungry new players who will treat small businesses with the respect they deserve. Which is great news for the emerging players in financial services and for the more than two million small businesses in this country.
Andrew Colliver is the CEO of Banjo, a Melbourne-based online lender providing secured and unsecured loans to Australian SMEs.