Banks are reinventing themselves. There was a time when theafter the disaster of the last recession. Robert Outram looks at how they are doing it. traditional High Street bank manager was content to do little more than take deposits and loan out money, possibly dispensing a little avuncular advice along the way.
Now, banks’ customers are the targets for a bewildering range of extra services. Some of these follow on logically enough from the banks’ traditional role, such as personal finance products for individual customers or trade finance for businesses. Others, such as estate agency or fleet management, seem to be linked only by the rationale that a bank’s customer base makes an ideal springboard for marketing all kinds of services.
Simon Royle, an ex-bank manager who now advises companies on how to spot bank errors, believes the term ‘bank’ is itself misleading when applied to today’s big names. ‘They are major financial services conglomerates,’ he says.
Take Lloyds TSB, for example. The group includes two separate branch networks, Lloyds and TSB; a former building society, Cheltenham & Gloucester; an estate agency chain, Black Horse; as well as a general insurance business and a range of personal financial services.
A foot in the door for spin-offs
Banking itself is a foot in the door for the many component parts of the group. Personal customers are well used to a deluge of direct mail from their banks offering a host of services as well as loans, credit cards and so on. Now business customers are being offered a package of options to choose from.
Included among these is anything to do with payment systems. All the leading banks offer automated payment services, such as BACS, the clearance system that can cut down on processing costs. For a small workforce, buying in payroll services rather than employing a full-time clerk could mean lower overheads and most banks can provide this.
Exporting can be a headache, especially for a business entering an overseas market for the first time. Here, too, the banks can help. Midland, for example, includes, through HSBC Trade Services, advice on import and export and a variety of collection and payment services, guarantees, bonds and indemnities.
The bank can also negotiate cheques that allow customers to receive payment directly from Midland. HSBC Midland, the bank’s UK treasury operation, can also offer products to hedge against exchange rate movements.
Domestic trade finance sector
Domestic trade finance includes services such as factoring and invoice discounting. These were once seen as alternatives to loan finance and thus competitors of the banks, and slightly shady ones at that.
Today, the banks are active in that sector and many of the big names in factoring are their subsidiaries. For example, Lombard is now Lombard NatWest, Kellock is owned by the Bank of Scotland and last year Abbey National bought up County Factors, a medium-sized player in the market.
Private equity finance might also be seen as an alternative to funding growth through the banks, but here too they are embracing what were once competitors. The NatWest Angels Service arranges introductions between companies seeking equity finance and informal investors, the so-called ‘business angels’.
Telephone and computer-based banking are growth areas for business banking, just as they are for the consumer end of the market. The PC-based packages in particular are geared to the needs of the smaller business that does not have its own in-house finance function.
An online service can be combined with a cash management package to ensure the business does not run into unexpected cashflow problems. Midland’s Hexagon not only gives access to detailed balance and transaction information but can provide a forecast of the end-of-day balance, taking into account items that are in the process of being cleared. Hexagon also links to Midland’s BACS service.
Whether or not a business has sufficient insurance is a matter of legitimate interest to a bank that has lent its customer a significant sum of money, and this represents a marketing opportunity for the banks’ insurance arms.
The Royal Bank of Scotland offers differentiated services for smaller companies (‘Businessure’), larger companies with turnover above #1m (‘Commercialsure’), agriculture (‘Farmguard’) and clubs and societies (‘Leisureguard’). It also has a risk management operation, RBIC Risk Services, which aims to reduce dependence on insurance as the only protection against risk.
Risk management provision
Under the heading of ‘risk management’ the bank can provide, among other services, health and safety advice, property protection audits, and security audits. As the Royal Bank puts it: ‘Effective insurance and risk management will allow for a smoothing of the cost of risk, lessening the effect of cyclical insurance markets.’
The banks even want to manage your fleet of company cars. Barclays Vehicle Management Services offers contract hire or purchase, maintenance and repairs, vehicle renewal and even roadside rescue arrangements – though it stops short of declaring Barclays to be ‘the fourth emergency service’.
The advantage to the customer, Barclays says, is that the bank has the purchasing clout to negotiate bulk deals with manufacturers and suppliers of fleet services.
Is there anyone the banks are not competing with? They are in the field of offering general advice to small business, although, according to Peter Ibbetson, head of small business services at NatWest, this doesn’t mean they are stepping on the toes of the legal or accounting professions.
‘The customer has the right to expect some small business advice on, for example, managing cashflow, exporting and the services that are available.
We position ourselves as a financial partner of the customer.
‘But solicitors and accountants are professionally qualified in their own fields, and we would not give legal or accounting advice.’ Ibbetson adds that some customers ‘don’t want to bare their souls to their bank’ and sometimes do not come seeking advice until too late.
Banks are still recovering from a poor reputation as far as small business is concerned. Relations began to sour during the 1980s when banks started to cut back on their branches, in many cases removing the personal relationship that existed between the bank manager and his or her business customers.
They worsened in the recession of the early 1990s, when they were frequently accused of ‘pulling the plug’ too quickly on too many small businesses.
Since then, the banks have worked hard to repair the relationship. A survey of 10,000 business customers, carried out in 1996 by lobby group the Forum of Private Business, found all of the banks had improved approval ratings compared with a similar poll two years earlier.
Allied Irish, Yorkshire and Lloyds were the highest-rated, with Barclays coming last out of the big clearing banks. The FPB study found that ‘participative’ relationships, where the relationship is closer and both parties keep the other better informed, led to much higher satisfaction ratings.
A more recent survey, published last month by BDO Stoy Hayward, gives even higher marks to the banks. It found that 70% of growing businesses believed ‘the bank understands our needs’ and a third considered their bank as ‘a valued adviser on business development’.
Less than half (45%) saw the bank as ‘just a place to keep our money and make transactions’, while only 15% described the bank as ‘something I only deal with when I really have to’.
Those who felt banks were out of touch with their requirements as a growing business said the biggest area for improvement was in understanding their individual circumstances and needs.
Banking with all-round support
For the 70% who agreed the banks understood their needs, the most valued attribute was ‘all-round support, advice and range of services’.
Stoy’s head of London operations, Solly Benaim, links the findings with the growth of the banks’ specialist advice services. He says: ‘Banks no longer appear to be viewed as expanding businesses’ only natural adviser, but rather as a stopping-off point for all-round support and services.’
One reason behind the banks’ success is an investment in personnel with an understanding of, and empathy with, small business. At NatWest, for example, a philosophy of ‘relationship banking’ includes a network of small business advisers and business managers, with at least one of the former in every High Street branch.
The 1,200 business managers all attend a specially commissioned training course at Durham University Business School, and Durham also runs, with the Institute of Business Advisers (IBA), an accreditation programme for NatWest’s small business staff.
This includes a written examination to assess technical knowledge, a project based on a real small business, assessed by Durham, and a role-play of a meeting with a small business customer (played by an assessor from the IBA). NatWest’s Peter Ibbetson says: ‘If they don’t pass the accreditation programme, they have to go back for more training.’
The business managers also take part in what the bank calls the ‘Linkage Programme’, in which they are seconded for a few days or weeks to a small business to get first-hand experience of life at the sharp end.
Lloyds Bank also has a division catering for small business, but it also specifically targets the middle tier of companies, those with turnover of more than #1m but operating on a smaller scale than the large listed corporates.
A dedicated approach is key
Lloyds’ Commercial Service operates through 250 relationship managers who focus entirely on that sector: they do not have responsibility for managing a branch and they tend to remain in the same post for at least five years. Lloyds says: ‘We believe our dedicated approach matches the key priorities of the middle market.’
There is, on the face of it, strong commitment on the banks’ part to tailor packages of services to the needs of the individual customer. But that also puts pressure on their managers to back up those services with a hard sell. Since small businesses do not often change banks, they represent something of a captive market.
The Federation of Small Businesses (FSB) fears that, although it is not the banks’ policy to make those extra services a condition for, say, a loan facility, some customers may feel that is an unspoken expectation.
Donald Martin, the FSB’s chairman of economic affairs, says: ‘Banks are looking for more revenue from promoting their other services.
‘The need is to make sure small business owners realise it is not obligatory to take the services if they are looking for a loan. We believe the banks should make that clear, and we think they are not doing enough to dispel the impression the two may be linked.’
Can’t blame the conditional sell
But Simon Royle of Royle Consulting Group believes this is one crime to which the banks can plead ‘not guilty’.
He says: ‘There was some concern over conditional lending, where in some cases businesses were asked to take out loan insurance, but regulators such as the banking ombudsman severely frown on this sort of thing. I don’t believe small businesses have too much to worry about: they are free to buy financial products where they want.’
The statement of principles, produced by the British Bankers’ Association as a guide for dealings with small business, includes the promise ‘we will remind you to seek independent advice’ from an accountant, solicitor, Business Links and so on.
In practice, the banks will encourage customers to do so, says Eric Hindson, an associate with top 30 firm Cooper Lancaster Brewers. Hindson adds: ‘A sensible client will always ask for time to think. A bank may be offering services that may not be of use to you.
‘For example, online banking may not be much use if you are cash-rich or have few transactions, but if cash is tight and cheques are bouncing, it could pay for itself very quickly.
A business manager who understands the customer will only offer appropriate services.’
It is also important to understand the charging structure of any extra services. NatWest’s transaction costs are slightly higher, for example, but unlike many other banks, customers are not charged for management time. The small print is always worth a look.
Whether you prefer to buy in services as part of a ‘one-stop shop’ package or to use different banks and brokers, it is crucial to remember the banks are operating in a competitive marketplace. Put simply, it pays to shop around.
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