Banking on change – the new era of high interest business accounts

FOR small businesses having a good relationship with their bank is critical.

But although most owner/managers regard their bank managers as important consultants it doesn’t guarantee a happy marriage even if they are talking at the table.

And there is one area of banking in particular where small to medium sized enterprises (SMEs) will often feel the need to have a legitimate nag – and it’s not just about banking costs.

Interest rates paid on deposit accounts in many cases remain cursory. Many company managers feel that the failure to offer a decent interest rate on money put on deposit adds insult to injury given the paltry returns already given on many current accounts.

Such frustration is visibly damaging SME confidence in their bank. In a nationwide business banking survey conducted by HBOS last month of more than 1,000 owners and senior executives of small businesses, just 35% felt the banks offered them good value for money. Those questioned in Yorkshire and Humberside were a little more generous in their estimation with 41% believing they got a good deal from their bank.

Some banks may genuinely believe that SMEs, consumed with the business of day-to-day trading, don’t regard putting money on deposit as a priority. Many small businesses have a real need for savings accounts – for storing their tax and VAT revenues for example before passing them over to HM Revenue and Customs, or for coping with seasonal business trends.

For the leading banks to ignore this market, or to treat it with scepticism, flies in the face of all commonsense. It is estimated that the small business deposit sector is worth some £45bn a year.

Small and growing businesses usually keep themselves lean and mean to maximise their profits and curtail overheads – they want every penny to work for them – and expect that funds placed on deposit will attract at least the sort of return personal banking customers can achieve. They also don’t want to be hamstrung by rules over minimum deposits, turnover requirements or rules over the type of business they run.

At the moment, they find themselves saddled with a depressing array of uncompetitive offerings from some of the leading financial providers. There are signs, though, that things are finally changing.

In early April, Bank of Scotland (BOS) launched a new deposit account targeted specifically at SMEs. It currently offers to pay 25 basis points, or 0.25 per cent, above the Bank of England base rate – an actual return at present interest rates of 5.64% AER, or 5.5% gross per annum.

It’s being hailed as a positive leap forward in terms of current offerings. Indeed, if every small business currently holding deposits with the Big Four banks were to switch over to this account, it would add a total of £585m to their bottom line.

BOS is not the only high street bank to recognise the importance of the SME deposit account market. Barclays currently offers 4.07% on its Instant Access Saver account, while HSBC pays 2.8% on its Business Money Manager account.

The difference is that the rates of return offered by the BOS’s new Total Business Deposit Account are demonstrably higher and represent a real effort to bring consumer rates of interest to the SME sector. The product also has no strings attached – there are no withdrawal penalties and a balance of only £1 is required to open an account.

Given that borrowing rates between banks are actually going up at the moment as a result of ongoing turmoil in the financial markets, it may seem an inappropriate time for BOS to be quite so generous. In reality it is a wily move. The aim is not so much to placate existing small business customers as to win new ones.

North of the border, a third of all SMEs are BOS customers, and it is now keen to replicate that level of penetration across the rest of the UK.

The hope is that by luring SMEs into opening one of its new Total Business Deposit Accounts, BOS will also eventually be able to tempt them into bringing their current account banking over as well.

This is not a requirement of opening the account – customers can pay in and take out from any other UK bank – but it is hoped that they will then consider opening a sister Total Business cheque account, and so begin to plough the furrow of long term relationship banking.

Bank of Scotland is clearly prepared to commit significant resource to winning new SME business. Its Total Business current account currently also pays 5.64 per cent interest, though it does have transaction charges which you don’t have to pay with its deposit product.

The bank is also offering an incentive for SMEs, which are prepared to make a commitment to taking multiple products. Move your current account over within 12 months of opening a deposit account, and you will be given a guarantee that your savings will continue to accrue interest at least at base rate in years two and three. For the following two years, the guarantee is at least base rate minus 0.75 per cent.

Of course by then, there may be better value products available in the marketplace, but this promise does at least offer transparency and certainty of pricing. Few savings institutions would be prepared to give this sort of guarantee over five years.

Will the move work and tempt SMEs to defect? That remains to be seen. Persuading customers to switch accounts is notoriously difficult, and business account holders tend to be even less willing to change than personal customers in this regard. According to the Office of Fair Trading (OFT), there does not appear to have much increase in switching among small businesses since 2002.

The OFT also reports that there seems to be a lack of confidence in the effectiveness of the switching process among SMEs, with little awareness of the safeguards which are in place to ensure the process goes transparently and smoothly. The result is that the actual level of change remains low, at about four per cent per year.

Another inhibitor is that many customers are not fully aware of their banking costs and so don’t always find it easy to compare rival products. BOS is clearly hoping that the simplicity and headline grabbing rate offered on its new account will overcome this.

The clear message seems to be fairly or not that small businesses do not feel they are getting the very best from their banking partners. Yet the switching statistics show that if senior executives in small businesses were prepared to overcome their own inertia the opportunities are there for them to fare better.

The new BOS offering is a persuasive one and in a fiercely competitive market will almost certainly be replicated by others. The sun is shining: if small businesses decline to make hay now then they really only do have themselves to blame.