Small Talk: Small firms are missing out on the advantages of switching banks

Complaints by small businesses about their banks have tended to focused on credit – or the lack of it – in recent times, but what do these customers think about the rest of the service they receive? Are they happy with the way their business current account is run, and are they getting a fair rate of interest on the often sizeable amounts of cash they hold?

At face value, data from the Payments Council suggests the answer to those questions is, for the most part, yes. Last week, the organisation published a review of the first year of its current account switching service, designed to make it easier for individuals and small businesses to change bank. Overall, the initiative has been a success – the 1.2 million switches over the year to the end of September this year represented a 22 per cent increase on the previous year. Small business customers, however, account for only a tiny proportion of the switching activity – fewer than 20,000 moved banks, the Payments Council says.

So does that low switching level really signify a high level of satisfaction among small businesses with their banks? Not according to the Federation of Small Businesses. The low take-up level actually reflects a failure to reach out to small businesses, the FSB argues. Its own research suggests that large numbers of small businesses still believe that changing current account provider is likely to be time-consuming and bureaucratic.

The FSB has a point. Almost all the publicity around the introduction of the current account switching service last year was geared towards individual customers rather than small business account holders, and this emphasis has continued in the ongoing campaigns to encourage more people to consider moving bank. As a result, many small businesses don’t know they are covered by the initiative.

One problem may be that only businesses with the most basic business accounts have the right to call on the guaranteed service levels the new switching process offers. That is a potential source of confusion. The wider issue, however, is that small businesses just haven’t been targeted with the same enthusiasm as individual customers.

In fact, it’s not just their current accounts that small businesses should be moving – the business savings accounts that many use to hold cash are often a poor deal. A survey by Cambridge & Counties Bank reveals that one in four of these accounts pays 0.1 per cent a year interest or less on small businesses’ cash deposits. It doesn’t usually matter how much cash is in the account – one in five providers pays these paltry rates even on balances of £1m.

With the best accounts paying up to 20 times as much as the worst offenders, switching deposit account provider could make a huge difference, particularly given the large cash balances many small businesses are opting to maintain. The British Bankers’ Association says that between April and June this year alone small businesses added almost £2.3bn to their deposits.

What we’re seeing now in the small business banking sector is a repeat of what happened in the individual current account industry. For years, the debate about value there centred on the cost of overdrafts – authorised or otherwise – and bank charges, even though the majority of customers at any given moment were in credit.

So it is with small business banking. For all the controversy over whether the banks really are prepared to lend or not, the evidence is that the majority of small businesses are not currently in the market for borrowing. What they need from their banks is a more efficient day-to-day service and a less scandalous rate of interest on their cash. Higher switching rates would deliver those benefits, just as the increasing competition for individual current account customers has seen banks forced to up their game on these products. Sadly, the evidence from the Payments Council suggests far too few small businesses currently move account provider. Much more now needs to be done to reassure these firms that moving is far easier today than it once was.

Britain’s most generous tax-incentivised investment scheme is booming, figures published today suggest. The Seed Enterprise Investment Scheme (SEIS), which offers a string of tax breaks to investors prepared back small start-up businesses, last year saw a 73 per cent increase in the number of companies seeking to raise money this way, according to Radius Equity.

The private equity company says 2,582 start-ups applied to HM Revenue & Customs for SEIS status in 2013-14, compared to 1,644 over the previous 12-month period.

The SEIS, which is aimed at companies less than two years old and with fewer than 25 employees, was launched by the Chancellor, George Osborne, in the 2012 Budget to encourage investment in start-ups.

Stephen Norton, a director of Radius Equity, said: “The tax breaks the Government has put in place are attracting huge numbers of start-ups and investors.”

You heard it here first. Two weeks ago, Small Talk warned that small businesses were sleepwalking towards a pensions disaster by ignoring legally binding deadlines for providing staff with retirement savings schemes. Now the Pensions Regulator has vowed to penalise those who fail to comply with the “auto-enrolment” rules.

Mark Boyle, chairman of the Pensions Regulator, concedes that failure rates for smaller companies are likely to be far higher than they were for larger employers, for which auto-enrolment has already come into force. The regulator appears to be giving up on the softly, softly approach, and is now preparing to wield the big stick.

“Despite our message to prepare early, we will see more firms not complying,” Mr Boyle told the National Association of Pension Funds annual conference last week. “This is not acceptable and we will use our powers [to issue fines and penalties] where appropriate.”

“Up until 1980 my family ran a tannery making leather for the footwear trade – I am the fifth generation and the business was founded in 1875. But competing with overseas tanneries became too difficult so my father and I took the difficult decision to close the tannery. I am a trained tanner and we still had a passion for manufacturing which in the 1980s in the UK was bonkers. But we knew a customer who had the equipment to make bags so we launched a bag business with just four people. The business has grown from there and is still family-owned.

“We started by making bags for other people, such as Pickett. In the 1990s we started making luggage and bags for Aston Martin and then we decided to launch our own label. We were making products for a few businesses in Japan but in 2005 we switched from using an agent to a distributorand the business took off there.

“Now 40 per cent of our sales are from Japan, 20 per cent from the US and 20 per cent from the UK. The remainder is making bags and luggage for other luxury brands including Church’s shoes and Aston Martin.

“Having a website is a great step and although we sell our brand in stores including Fortnum & Mason and Pickett the website is now our biggest retail outlet. But you can’t just set up a website and sit back. It takes a lot of work to drive people to the site.

“We employ 38 people now and turnover last year was £4.8m. The plan is to continue to steadily build our brand and raise awareness here in the UK.”

@davidprosserind