How small business firms select a bank: RESULTS

Completed questionnaires were received from 384 firms in the United States and 1,249 firms in Australia. Of the 384 US firms, 115 or 30 per cent were small businesses. Of the 1,249 Australian firms, 614 or 49 per cent were small businesses.

The higher small business response rate in Australia was not surprising given the high level of debate on banking practices in the financial press in recent years. Using standard banking industry classifications based on sales levels, small business firms were identified as a firm with sales under US$5m or under A$10m. The difference in sales levels between the two countries is due primarily to the exchange rate at the time of the survey and overall industry size.

Background information on respondents

As shown in the demographic information in Table 1, the average length of time that the small business firms had been in existence was almost the same in both countries; 20 years for firms in the USA and 21 years for firms in Australia. In both countries, these firms had used their primary bank for an average of 12 years. Another similarity was the fact that 17 per cent of the small business firms in each country had changed banks in the last three years.

Table 1 Demographic information

American firms

Australian firms

Average time firm has been

in business (years)

20

21

Average time firm has used

bank (years)

12

12

Firms that changed banks in

last three years

17%

17%

Firms that will change banks

in next 12 months

11%

15%

Firms using one bank

70%

88%

Firms using more than one

bank

30%

12%

On the other hand, some differences were noticed in the banking relationships of the small business firms. US firms indicated that they were less likely to change banks during the next 12 months (11 per cent versus 15 per cent). In addition, a greater percentage of Australian small businesses were using only one bank (88 per cent) compared to small businesses in the US (70 per cent).

Table 2 Type of bank used

American firms

(%)

Australian firms

(%)

Local community

28.4

One of the ‘big four’

86.0

bank

Regional bank

9.0

State-wide bank

34.9

Overseas bank

2.6

Regional bank

23.9

Other

2.4

National bank

10.1

International bank

2.7

The fact that 15 per cent of the small business firms in Australia were interested in changing banks is not surprising given concerns over banking competition in recent years. In an industry dominated by four major national banks, it is also not surprising that the majority of Australian small business owners are using only one bank. Each of these banks has branch networks throughout the country as well as subsidiaries in the major financial centers of the world.

Table 3 Area of operations

Operations

American firms (%)

Australian firms (%)

One state only

74.8

51.2

Several states

14.8

20.5

Nationwide

6.1

7.6

Nationwide/overseas

4.3

20.7

Tables 2 and 3 provide information on the type of bank used and area of operation. (The question on the type of bank used had to be modified in the Australian survey since the banking structure in Australia is different from the one existing in the United States.) As shown in these tables, over 80 per cent of the American small business firms use a local, statewide or regional bank as their primary banking partner and 75 per cent of these firms have operations in only one state. In Australia, 86 per cent of the small firms use one of the four major banks and over 20 per cent have international operations.