Losing interest in banks
Article Date: Aug 22 2007One in four senior executives has no idea of the rate of interest they receive on their company’s cash deposits. It’s an alarming statistic, argues Linda McBain, head of banking and treasury at Investec Private Bank.
The research, commissioned by Investec last year, also revealed that businesses with a turnover of at least £1 million hold on average around £690,000 in deposit accounts. In the current environment of rising interest rates, entrepreneurs could be forgiven for assuming that these deposits will be netting a reasonable return.
Unfortunately, this is not the case. Banks are under no obligation to alter their rates of return in line with UK base rate changes, and our research has shown that many choose not to do so. For example, following the quarter per cent rate rise in November last year, 13 per cent of business accounts with balances of £25,000 or more had not increased their rates at all one month later, and less than two thirds had passed on the full quarter per cent to their business customers.
Last month’s increase in the base rate was the fifth rise since August 2006, and unless business owners have had the good judgement to monitor their deposit rates closely, it is likely that they will be missing out.
Unfortunately, this is nothing new. In 2000 the Cruickshank Report identified a distinct lack of competition in the small to medium-sized enterprise (SME) banking market.
One of the report’s proposed remedies was to empower the consumer – in this case business owners – through information. With the right information, the report argued, owners would be able to take responsibility for their own financial wellbeing, shop around and exert the pressure needed to drive a competitive and innovative market.
Like our research, the report found that interest rates paid on business bank accounts were typically poor. On top of this, most SMEs were required to pay an annual charge for holding a current account, then charged again for individual transactions.
According to Cruickshank, at the time of the report, only three to four per cent of SMEs switched their current account provider each year. The suggested reason for this was a simple lack of information on the range of banking products available. It’s also worth pointing out that it can be hard to establish the comparative prices of these products as the prices for money transmission services are often negotiable and loan prices vary according to risk.
In 2002, the Office of Fair Trading (OFT) conducted its own investigation into the banking services offered to SMEs, with similar results. In particular the OFT concluded that SMEs were suffering excessive charges caused by a lack of competition in the sector. As a result, the Competition Commission instructed the big four banks (HSBC, Royal Bank of Scotland, Lloyds TSB and Barclays), with whom more than 70 per cent of SMEs hold accounts, either to offer better interest on business accounts or to scrap charges. It also demanded that these banks make it easier for SMEs to switch their accounts.
The situation today does not appear to have improved much, as our research suggests. And yet there are business accounts out there which not only offer attractive benefits and fair charges, but consistently competitive interest rates.
One of the best sources of information for businesses looking to open a new bank account or switch from their existing one is Business Moneyfacts. Less widely publicised than the consumer version, this financial research agency provides independent analysis of the best bank accounts on the market.
The most important thing to bear in mind is that you can’t afford to be apathetic with your company’s cash. Rates vary enormously; best buys often slide down the rankings and bonus rates disappear, so make sure you are getting consistently good returns.
