UK businesses lack interest

Written by Alex Smith, Head of Corporate Deposit Services at Alliance & Leicester Commercial Bank

Friday, 08 August 2008

Greater attention to the returns generated from deposit accounts could prove of real benefit to UK SMEs, says Alex Smith.

Many UK businesses are now finding themselves compelled to tighten their belts. Expansion plans are being shelved and costs cut as companies look to ride out the challenging market conditions ahead.

In such an environment, every angle for potential revenue growth or expenditure reduction deserves attention. Businesses tussle with suppliers, look to re-negotiate payment terms with creditors and debtors, and generally apply a greater focus to the minutiae of finance.

Yet when it comes to business banking in general, and deposit accounts in particular, many businesses are neglecting an area that represents a significant potential ‘easy win’.

A survey from the Office of Fair Trading (OFT) in 2006 revealed that 58% of UK SMEs have business deposit accounts. After overdrafts and current accounts, they are the most popular banking facility among businesses. And, particularly at present, building cash reserves to help weather the storm could prove a key survival strategy.

A wide range of account offerings exist, with significant variations in the options for account management, fund depositing and withdrawal and – most importantly – interest rates. So the choice of deposit account, clearly, is an important one.

Yet 70% of business deposit accounts are held with one of the traditional big four banks – NatWest, Barclays, HSBC or Lloyds TSB. And given that the largest banks are not necessarily those offering the most generous rates, the resultant lack of interest on the part of businesses is resulting in a lack of interest payments won on companies’ cash deposits.

Indeed, it would seem that many if not most UK SMEs hold their deposit accounts with their current account provider, rather than having examined the options available to them at other banks.

When surveyed by the OFT on the key reasons to use one bank for all their banking requirements, businesses identified reduced administration, and greater ease in keeping track of their money.

These criteria, however, are redundant for two key reasons. First, market conditions make it necessary for firms to deal with administrative burdens if it may help their bottom line.

Second, the prevalence and indeed virtual ubiquity of telephone and internet banking make the management and tracking of accounts at different banks now as straightforward as having them at the same bank.

Further, the rise of financial websites and magazines devoted to comparisons of available services and products removes another excuse for the financial director or business owner who may put off re-evaluating his or her financial arrangements due to the perceived difficulty in finding a better deal.

In 2006, the Federation of Small Businesses (FSB), conducted a survey and produced a Report on Small Business Banking. In the report, it was observed that banks other than the traditional ‘big four’ had increased their market share of small business banking provision by 13% since 2000.

This is progress, but in a business banking marketplace increasingly teeming with competitive offers, it still suggests that many businesses are not fully taking advantage of the options available to them.

It is noteworthy that SMEs surveyed as to the benefits of using more than one bank identified better rates on loans or deposits (21%), and cheaper or lower bank charges (21%), as the key differentiators.

Both factors are undoubtedly of increasing priority to those who have previously disregarded them in favour of devoting their energies to increasing sales, formulating ambitious expansion plans or otherwise riding the good times while they lasted.

Now businesses can take advantage of the current proliferation of accounts, as banks, like businesses, adapt to the economic environment.

Certainly, Alliance & Leicester Commercial Bank (ALCB) has developed a new product range, from instant access, to term accounts, to restricted access accounts – allowing businesses to opt for an account offering the optimum interest rate and level of access for their requirements.

Also, more exotic deposit options are now more widely available – such as money-market linked treasury accounts, with interest rates dependent on how long funds are deposited for.

Such accounts have previously been offered only to businesses making deposits of millions of pounds – illustrating how the market has now opened up for SMEs.

The table below provides an indication of the varied rates offered on standard deposit accounts across some of the major banks:

Bank	Account	AER Rates on a Balance of:
		£1	£2.5k	£5k	£10k	£25k	£50k	£100k	£200k	£500k	£1m
Abbey	Business Reserve	3.25	3.25	3.25	3.75	3.75	3.75	4.25	4.75	5.00	5.03
ALCB	Business Instant Savings Account	4.17	4.17	4.17	4.17	4.17	4.90	4.90	5.16	5.16	5.16
RBS	Business Bonus	2.32	2.32	2.32	2.53	2.68	2.68	2.94	2.94	2.94	2.94
Barclays	Business Bonus	1.60	1.60	1.60	1.60	1.60	1.60	1.60	1.60	1.60	1.60
Co-Op Bank	Corporate Reserve	1.13	1.13	1.13	1.13	1.13	1.60	1.60	2.11	3.68	4.55
HSBC	Business Money Manager	2.55	2.55	2.55	2.55	2.55	2.55	2.56	2.56	2.56	2.57
Lloyds TSB	Business Instant Access	2.53	2.53	2.53	2.53	2.53	2.58	2.63	2.68	2.68	2.89
Natwest	Reserve	2.52	2.52	2.52	2.52	2.52	2.52	2.52	2.52	2.52	2.52
Source: Business Moneyfacts June 2008