How small business firms select a bank: DISCUSSION

How small business firms select a bank: DISCUSSION

A possible reason for the difference in the rankings between the two countries may be due to the nature of the banking organisations that the small business firms deal with. As noted before, the structure of the US banking industry is somewhat different from the banking structure existing in Australia. Approximately one- third of the banks in the United States are community banks. While community banks may offer more personal banking service, their limited size and financial resources may also prevent them from offering a full range of products and services to their customers. To obtain specialised financial services, small business customers may be required to have relationships with more than one bank. This would be especially true, if a small business firm had operations outside its home state or had large borrowing requirements.

In Australia, most small business firms deal with one of the four major national banks. As already indicated, these banks have branch offices throughout Australia and most have subsidiaries in the major financial centres of the world. They offer a full range of products and services including money market accounts, sweep accounts allowing business to net transactions, an extensive loan portfolio, foreign exchange operations, and various derivative products such as forward rate agreements, swap, and option facilities. These banks are in every sense of the word ‘full service’ banks. Consequently the ranking of factor B, product and service delivery, as more important is understandable for small business firms in the United States. Most Australian small business owners take factor B for granted.

The high ranking of factor H, convenient location, for American small business firms is also not seen as an issue for small business firms in Australia. Since the majority of these firms bank with one of the ‘big four’ and these banks have a branch office in most towns and suburbs, going to the bank is relatively easy. However, in the United States where many unit banks have only a single head office, access can be difficult and location becomes an issue.

The importance of factor M, the bank’s financial health, is another difference. The relatively large number of American bank failures during the late 1980s and early 1990s have no doubt caused customers to be concerned about the safety and soundness of their banking partner. A small business firm has sufficient problems in chasing slow paying customers, it should not have to worry about the security of the funds it has already collected and deposited in the bank. In Australia, there have been no bank failures since the Depression so financial health is not a concern.

The importance of factor G, providing a personal banking relationship, can also be attributed to the community bank environment existing in the United States. Because small business owners and community bankers typically have a strong presence in their local communities, it is natural for them to work together. In many cases, the success of their organisation depends on it. Many small business firms in the United States select a community bank as their banking partner for this very reason. In Australia, the four major national banks have a very large workforce and employees are constantly being moved around. As a result, small business owners are unable to develop close personal relationships with their banks and many do not even try.

In Australia, the high ranking of factor F, the ability to provide a long-term business relationship, is seen as a result of the change in small business attitudes towards bankers since the recession in the late 1980s. When the recession hit, many banks reviewed their past liberal lending policies. Some banks recalled loans or refused to extend further credit. In the end, many small- to medium-sized business firms were forced into liquidation and they could no longer trust their banks to provide financing over the long haul. Under difficult economic times, having a solid relationship with their banker is clearly something most business firms desire. This is particularly true in the case of small firms with limited financial resources, who are the most vulnerable.