I have had a few bankers in the office recently conveying the message that they are keen to re-engage with the SME community. Before the crash I knew and was on first name terms with most of the Senior Managers of the City Centre branches in Edinburgh. The Banks used to be at the heart of our business community and we enjoyed long-standing relationships based on trust and mutual respect. However, Senior Managers I knew have nearly all now gone and, as a brief walk along Edinburgh’s George Street will quickly show, their wonderful buildings have mostly been converted into restaurants and public houses.
As the banking sector imploded, a whole new generation of entrepreneurs has emerged with a working assumption that the clearing banks are not there to help them. This has created opportunities for the new challenger banks such as Aldermore and Metro Bank and crowdfunding which is now witnessing exponential growth. Without any thought, I found that I was able to jot down the names of no fewer than fifteen crowdfunding platforms in less than a minute. However, we cannot manage without the Banks and we all need to work on re-building these trusted relationships so that the Banks can once again claim their place at the heart of the business community. This led me to ponder what it is that emerging new businesses actually need from a Bank:-
I have heard astonishing stories about bureaucratic delays in opening bank accounts and have witnessed the unnecessary frustration and expense which this can cause. This gets the banking relationship off on the wrong footing from the outset as a result of simple bureaucratic failure which never used to happen “in the old days”. On the other hand, Metro Bank is capable of opening a new bank account in fifteen minutes. If the Banks wish to re-engage with the entrepreneurial community, they must be able to open bank accounts with a minimum of inconvenience and in an acceptable time frame.
Over the years I have had the privilege to work with many high growth technology companies, right from the pre-revenue stage. Companies developing new technologies may not have substantial revenues in the early stages but they are often quite complex with external shareholders and international Collaboration Agreements of one kind or another, dealing with the protection, development and exploitation of Intellectual Property. Such companies may be quite happy to make use of telephone banking on a day to day basis. However, the one thing they do need from a Bank is a relationship with an Account Manager who is willing to take the time to get to know them and understand their business. The one thing they do not need is to be fobbed off with a call centre.
High growth companies almost invariably have an international outlook and international trading relationships. If they are trading in a foreign currency they may need to open bank accounts in that currency so that they can receive payments from customers and pay their suppliers. Their Bank should be able to satisfy a simple request for a foreign currency account in a major currency as a matter of course and should be able to provide knowledgeable advice about foreign exchange issues.
There appears to be a fairly wide spectrum of rates available at different savings institutions. In order to weather the recession, many companies have learned to conserve cash. Perversely, some of the Banks now find themselves sitting on deposits which they now need to deploy as loans but are finding it difficult to do so as customers are much more cautious about taking on debt. However, if they wish to retain these deposits, their interest rates will need to become more competitive or they will gradually be eroded by peer to peer lending platforms which offer more competitive rates.
I come last to borrowing quite simply because entrepreneurs have had to find other ways of financing their businesses and in many cases they no longer see the Bank as the first port of call for finance. Over the past five years those of our clients which have been most exposed are those with real estate and a heavy exposure to the Banks. Those which have focused on Intellectual Property (as distinct from heritable property) have emerged largely unscathed because they have had to finance their businesses with equity rather than debt.
It was pointed out to me by one banker friend that as the “old guard” of bankers has gone, a new generation has emerged who do not understand equity finance from venture capital and Business Angels which is a rather worrying thought. However, emerging new businesses which have properly structured balance sheets and interesting intellectual property may be a less risky proposition than a highly geared company which is only able to offer a property as security.
The security value of Intellectual Property is a very complex issue which has just been the subject of a major report and the Banks will clearly need to adapt their lending products to meet the needs of today’s innovative new businesses which will become the great companies of tomorrow. At the same time, today’s entrepreneurs have learned from the lessons of the recent past, that the worst thing they can do is put their businesses unnecessarily at risk by taking on inappropriate levels of debt.
I remember one senior banker telling me that banking is a very simple business - they aggregate deposits and make loans and everything else is spin! However, the Banks major assets are their vast networks of customers, their knowledge base and the deep industry experience which they have obtained in relation to their different customer groups. They could make much better and more effective use of these unique assets by sharing their knowledge more effectively with their customers and by arranging customer seminars and events to bring together business people from different walks of life. This would help to generate new ideas, encourage people to do business with each other and enable the Banks to play a leading role in promoting the economic recovery. This is something which they could do at very modest cost and I can think of no more effective way for the Banks to put themselves back at the heart of our business community and regain the confidence and trust which they used to enjoy.