The Truth About Business Banking

It’s clear that a number of banks must redefine what they mean by ‘relationship banking’ if they are to win back the confidence of business leaders. The smart financial institutions recognise this and are trying to reorganise in order to provide a less bureaucratic, process-driven service to businesses, although the operational challenges of meeting this demand are huge.

When Members of the Criticaleye Community were asked to diagnose the health of the relationship between banks and business, it seems that, while not exactly terminal, some serious rehabilitation is needed. The main themes to emerge include:

  • Quicker decisions
  • Less box-ticking
  • Greater competition (among banks)
  • More time to understand a business
  • Better preparation (by businesses)

The current assessment process is often viewed by management teams as laboured, draconian and arbitrary. Kevin Appleton, former CEO of equipment hire company Lavendon Group plc, says: “The challenge in the UK is how concentrated the commercial lending sector is, where you only have four or five lenders to choose from. I’d like to see more competition in lending and a return to balanced judgments rather than box-ticking. Fundamentally, banks must remember the lessons of the last few years: lending indiscriminately will create problems.”

A rational and transparent approach to lending ranks high on the wish list of CEOs of both large and small concerns. Bernie Waldron, a Criticaleye Associate and Non-executive Director of various companies, says: “Although there are a number of excellent bank managers that deal with smaller businesses, there are also plenty that struggle to understand their clients business and marketplace, making it difficult for them to take intelligent judgments on who to back.

“Prior to the economic downturn in 2008, when bank financing was perhaps a more mechanical task, I think the banks may have under-invested in people who can relate to the complexities faced by SMEs. Often, the business insight of the bank’s ‘point people’ who are taking decisions and making recommendations up-the-line is not strong enough. The fact that SME banking is normally organised by geographic region rather than client industry only exacerbates this issue.”

You never listen

A lack of communication has heralded the end of many a relationship, and that’s no different when it comes to banks and businesses. A significant number of Criticaleye Members expressed real frustration at simply not being able to talk to their bank so as to explain properly the position of an organisation.

Ian Bowles, Criticaleye Associate and CEO of AIM-listed Allocate Software, says: “While we haven’t had any issues with our bank, I’m not sure banks spend enough time understanding their clients’ businesses. If the debate is essentially about funding growth, banks need to understand the business drivers of their customers.”

Mary Jo Jacobi, Criticaleye Associate and former advisor to Lehman Bros and the board of HSBC, says: “Banks need to return to the partnership approach they once had with their business customers, where they had a symbiotic relationship of trust and reliance.”

Blame culture

As much as it’s been the vogue to bash banks in recent times, what doesn’t get discussed is how numerous businesses are falling short due to poor financial controls and plain ignorance about what banks want to see.

Ian says: “The other side of the coin is that business leaders need to be realistic and sensible when putting forward business plans, with demonstrable models and tolerance levels. When we put forward an M&A proposition, which the bank will review, we have at least three scenarios built into the model, so they can see the tolerances for our ability to generate or repay cash. If you haven’t considered the variants to the plan, the banks will not see it as credible.”

In certain instances, companies are failing to wise up and realise that times have changed. Mark Stokes, MD of Large Corporates at Lloyds TSB, comments: “There needs to be a very good dialogue and a healthy sharing of information between management teams and banks; it makes banks feel they understand the business. Banks will then feel more comfortable when that customer comes to them asking for backing for M&A or an expansion opportunity, and will be better placed to do it because they have that in-depth knowledge.”

For Ian, the relationship has to be taken seriously: “If a bank wants time in a CFO’s or FD’s diary, they should get it in equal measure with investors or City analysts because it’s a fundamental part of the business. There should be no shocks either way: the company shouldn’t default on payment terms and conditions, but likewise, if a bank has indicated support for growth, perhaps through acquisition, you don’t want to hit any roadblocks with paperwork because the terms and conditions or the environment has changed.”

Mark states that if the dialogue exists then it’s easier to establish and set out common goals. “Some corporates go about it a different way,” he says. “They go to the opposite extreme, looking at a bank as more of a purchasing process, which doesn’t support a long-term relationship and sharing of information; therefore banks might not be as willing to support whatever it is that business is seeking to do because they don’t really know them.”

A personal touch

The big challenge for many organisations, not just in the financial services sector, is to get closer to customers. Steve Cooper, Managing Director, Barclays – Business and Personal Banking Solutions, Barclays Bank, argues that significant steps have already been taken in the past few years to recalibrate the relationship with businesses: “We’re being a lot more focused. When we do refuse a loan we are very thorough about how we communicate that decision to the customer, both verbally and in writing. It’s very different to pre-2008, when banks were perhaps guilty of just saying ‘no’ or the relationship manager would blame a decision on head office. Now, it’s more joined-up and the organisation will explain the ‘no’ because of, say, these five reasons. He/she will also go further to see how they can help the client along those lines to improve or if it can introduce them to someone who can help.”

Andy Tinlin, who heads up Accenture’s financial services consulting practice dealing primarily with corporate and SME banking groups, comments: “Banks are definitely sharpening up their capabilities in terms of how they deal with customers, driven by having to reinvent revenue flows to replace a drying up of their more risky or speculative loans. This is the silver lining on a really big cloud, and over the next five years or so, I expect some of these commercial banks to adopt a much more customer-centric view of the world, meaning the recruitment of people from other types of industries to provide a better view of how they should perceive their customer base.”

This can seen as recognition on the part of banks that improvements have to be made. Andy says: “What this means for businesses is, in theory, a more bilateral and equitable relationship. However, banks must be careful that they don’t simply appear to be selling product. They must show genuine interest in a business and its objectives in the medium-term. Banks are a supplier to businesses and, in the same way as any other supplier, they must work to get the time they need in their clients’ diary and work hard to achieve better after-sale service.”

Steve clearly believes this is the way forward: “We need to remain close to our customers, remain transparent about costs and offer them plenty of choice. We must also become more efficient about informing our clients before they incur fees and be more creative about the lending options we’re providing in the long run. However, it must be sustainable; it’s important to remember that banks are not charities. It’s not our money but our shareholders’ money, so we can’t be reckless with how we spend their money.”

Reality cheque 

Banks are and ought to be profit-motivated and they shouldn’t be expected to support businesses artificially with balance sheets that don’t add up. David Molian, Criticaleye Thought Leader and Director of the Business Growth & Development Programme at Cranfield, says: “Many [management teams] have learned to [control] their working capital much more tightly and squeeze the cash they need from their business. In that sense they are better-managed businesses and, in the process of improving their working capital position, they have often improved margins as well.”

Geraint Anderson, CEO of mid-cap business TT Electronics, says: “Many mid-cap companies like us have taken action to improve their own performance and be less reliant on bank debt. We’ve taken self-help action in order to repair balance sheets and see where we could improve cashflow, debt position and working capital.”

In practice, the bottom line is that struggling businesses are going to keep finding it hard when banks are tasked with simultaneously shrinking their balance sheets while also being under political pressure to lend responsibly. Paul Danos, Dean of Tuck School Business School at Dartmouth in the US, says: “I don’t see much appetite to take even reasonable risks on the part of banks and companies seem to be in a stagnant period where there’s not that much organic development.

“Given what the banks have gone through in the last four years, their tremulousness is understandable; and many say that US companies are frozen by uncertainty about taxes, regulations and other government policies. In Europe, the rolling credit markets with whole countries on the brink would instil caution even in the proverbial drunken sailor.”

It’s another reason why management teams should be switched on when approaching a bank for funding.

The days of easy money are long gone.

Please get in touch if you have any comments about the issues raised here.

I hope to see you soon.

Matthew

www.twitter.com/criticaleyeuk

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