How small business firms select a bank: RELATED LITERATURE

The study is a continuation of earlier work by Nielsen et al. (1994, 1995, and 1997). These studies surveyed both business firms and banks in the United States, in the earliest papers, and then Australia in the latter papers, with regard to the factors considered important in the bank selection process. Each of these studies indicated that there was a substantial difference between the banks’ perceptions of how customers choose a bank and the actual decision criteria of the business customers. The 1997 paper looked at the differences in business banking expectations between both countries without regard to firm size.

In recent years, much has been written concerning the marketing of financial services to business clients. The articles have been both conceptual and empirical; have focused on both large and small firms; have focused on variables both external and internal to the organisation, and have focused on both the buyer and seller side of the equation. A major contribution in this area by Tyler and Stanley (1999a) compared the contribution of 54 peer-reviewed articles and examined their chronological development. A conclusion reached by Tyler and Stanley, is that business-banking relationships ‘need to be increasingly studied in closely defined contexts’.

The bank selection practice of the small business firm is one such context. While research in this area has not been as extensive as the general marketing literature mentioned above, significant contributions have been made over the years. Early on, Turnbull (1983) identified some of the main factors that SMEs use in selecting a bank. In comparison to larger firms, their banking relationships are different. Small firms are interested in the quality of the relationship, while large firms are interested in price (Turnbull and Gibbs, 1989). Small firms require greater interaction (File and Prince, 1992), and in the case of family firms are more emotion based (Dreux and Brown, 1991).

Chaston (1994) identified significant gaps between SME’s desires and actual bank delivery. This was particularly true in the case of rapidly growing firms. Binks et al. (1992) found that rapidly growing firms not only have difficult access to funding, they have the poorest perception of bank services. Ennew and Binks (1996) found that improved information flow between SMEs and their bank would significantly improve their relationship. On the other hand, Bulter and Durkin (1998) found that bank structure was a major impediment to relationships.

In some of the practitioner-oriented literature, suggestions are made in terms of what banks should be doing to meet their small business customers’ needs or reports are made on what banks have done.

Other articles even show that bankers’ attitudes towards small business have changed over time. In the United States, for example, large lenders are attending small business conferences and learning to speak the language hoping to build market share. American banks are also using non-traditional means, such as phone marketing and establishing call centres to enter the small business market. By so doing, Wells Fargo is becoming the county’s top lender to small business.

The changing attitude of banks towards the small business customer should not be surprising given that small business firms can be highly profitable for banks. Cook (1995) suggests that small business lending is one of the few remaining areas of growth in commercial lending. In addition, Glassman (1994) suggests that the introduction of securitisation of small business loans may change the dynamics of small business lending. This will allow new loan originators to enter the small business lending market.

Another reason for this changing attitude is the fact that small business customers in recent years have not been satisfied with the relationship they have with their bank. A study by Nash (1993) found this to be the situation existing in the United Kingdom. The vast majority of firms surveyed banked with one of the ‘big four’ British clearing banks (Barclays, National Westminster, Lloyds, and Midland) and a major complaint was that there were too few alternatives to provide competition.

Another study by Hunter Clark Associates, reported that banks deliberately keep their customers, particularly small business, ‘in the dark’ by not clearly defining fee structures. Senior Partner Ian Clark claims that ‘small business bears the brunt all round in that they pay higher interest rates and higher transmission charges than other borrowers’. Carpenter (1997/98), Milligan (1993), Keasey and Watson (1993), Arnold (1991) and Smith (1989) all echo similar concerns.

Although this literature review has not been exhaustive, one can conclude from these articles that during the 21st century banks will have to recognise the changing nature of customer requirements and respond in an efficient manner to serve adequately the needs of their small business clients.