Is business banking lifting its game?

Posted by Jillian Stewart on Mar 11, 2019 1:47:38 PM
Jillian Stewart

Banks lifting their game

When banks are exposed, why don't they do more to help businesses manage risk? 

All successful businesses are constantly looking for ways to improve. However, banks in New Zealand generally ensure they have significant security over all business loans, usually over the owners residential properties. This means that there are few immediate returns in investing further in their clients business needs beyond debt facilities.

When banks have extended themselves, it has been in insurance, which in turn helps protect their own investments. In light of the banking royal commission in Australia and the reviews in New Zealand, banks are in the firing line for their insurance practices towards businesses and individuals alike. 

So rather than asking whether the banking sector is lifting its game we should be asking what areas each bank is focusing on and how they are going about it.

Business insurance offers from banks (and their partners) seem like a complementary value-add they feel obliged to have. But it certainly isn’t the first place a business would go to for cover or advice. When banks are likely to be a primary creditor, it seems counter-intuitive that they do not take a greater interest in their clients’ insurance and risk management practices. In some cases banks have even chosen to divest themselves of their insurance services completely and have ceased to offer insurance as a product.
Differentiation by service
In an increasingly competitive environment banks will continue to try and differentiate themselves on service. After all, one loan is much like another. Up until now, banks have limited themselves to a number of very basic startup guides and tools for small businesses. However, if banks want to truly be seen as supporting small businesses, they need to move to a much more inclusive solution providing startups and mature SMEs with sets of tools and information that are practical to use. This means delivering tangible returns, saving owners time or reducing real costs. Otherwise it has no value to an owner whose time and resources are already overstretched in meeting the day- to-day demands of the business. 
Addressing the opportunity

As with many opportunities in today’s society, the opportunity lies in technology. By being smart and using technology, banks (and other service providers) can provide SMEs with many of the same tools that are currently only afforded to large enterprises. This is a significant opportunity for a bank to own the SME market and build loyalty with its customers as they grow from a small to a medium and then into a large business.

Instead of providing a couple of basic add-ons, banks need to look closely at what assistance small businesses actually require, i.e where they can add the most value. Recent surveys about the needs of small businesses show that outside of cash flow (the funding facilities that banks currently provide), SMEs:
  • are most focused on acquiring new business and dealing with staff, both in talent acquisition and retention*; and
  • perceive the biggest risks to be around business interruption, cyber-risk, natural disasters, market developments and changes in the law** (three of which are easily insured against). 
From the outside, it would seem logical that by providing solutions that help small and medium businesses easily address some of the fundamental risk management practices, and by helping them attract and retain talent, banks will be able to help ensure the success of their clients. In doing so, banks would secure long-term and valuable business as these entities continue to expand and grow their borrowing in order to do so.
Why don’t we see this?

The reason that this doesnt seem to be occurring is probably attributable to the banks own reluctance to take on the reputational risk to their own brand by providing advice that is outside of their traditional comfort zone.

Should they choose to change tack, it would represent a fundamental shift in the approach a bank takes, from being a provider of working capital to being a business adviser and consultant. For the bank that is prepared the make the leap, the rewards would be significant. Not only will it win a larger client base, but those clients will be more resilient to shifts in the economy. Then, when market conditions change, they will be well positioned to take advantage of their competitors.
Where to now?

The global economy remains relatively strong but history and many of the early indicators tell us that we are due for an economic downturn at some stage in the near future. 

A bank is only as strong as its clients and loan book. The bank who has worked with its clients to minimise their risk and exposure through good practice and proposed insurances will be well placed to best weather the next economic downturn.
*My Business Survey, Australia
**Risks as identified by the Allianz Risk Barometer 2018

Topics: Insurance premiums, Business Management

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