Risk & Economy » Regulation » The pros and cons of switching banking partners

GRUMBLING about service providers is an English pastime, almost to the point where it could be elevated to an Olympic sport for the London 2012 Games. Whether complaining that utility bills are too high, phone providers keep us continually on hold, or all bank managers are cut from the same identikit cloth, there is invariably some form of tension between client and provider.

Those tensions have no doubt been exacerbated by the difficult financial straits in which we find ourselves. The past three years have produced challenges for Britain’s banks and their corporate clients on a scale not seen for decades; the next few years promise more of the same.

Amid the previous crash in the 1990s, Manchester Business School and Financial Director produced a series of surveys to investigate the state of the relationships between finance directors and banks. In this issue, we have taken a fresh look to see how things have changed.

In this year’s survey, we asked FDs, CFOs and financial controllers from 580 UK companies about their bank relationships, causes of relationship stress the areas in which they felt under-served, how the financial crisis affected their bank relationships, and how changes in macro-prudential oversight of the financial services sector will affect their businesses in the near future.

While the sentiments expressed by survey respondents were generally both balanced and moderate, the research also revealed that 14 percent of businesses were either likely or very likely to consider switching their main relationship bank within the next year.

“Anecdotal evidence suggests that fewer than two percent of companies change their main relationship bank in any given year, although our survey shows that switching intention runs much higher,” says Charles Schell, a fellow at Manchester Business School with whom Financial Director worked on this study.


According to Schell, clients of the taxpayer-backed banks were the most likely to defect. 15.6 percent of RBS and 16 percent of Lloyds clients said they were likely or very likely to switch, compared to 11 percent of Barclays or 12.8 percent of HSBC clients. Barclays clients tended to have the more stable relationships: 81.5 percent of Barclays clients surveyed had dealt with the bank for more than five years, compared with 76.7 percent for RBS and 72 percent for Lloyds.

Breaking up isn’t easy

So what is it that banks do to prevent those determined to leave from doing so? And what makes those that have not expressed a desire to change their main relationsip bank stay put?

This year’s survey confirms that the majority of corporate clients that have maintained a stable relationship for at least five years – a remarkable 73 percent of those polled – are significantly less likely to switch banks. Is this loyalty, or do businesses in stable, long-term relationships stick with their banking partners because they don’t perceive a better alternative? Or are the break-up costs just too high?

“As markets improve and businesses are positioned to seek better alternatives the competitive landscape in corporate banking may again see a major shake-up,” says Schell.

Asked to select the reasons why they did not intend to change banks, more than 54 percent explained that their loyalty resulted from general satisfaction with their bank, but there was a sizeable number (51 percent) who cited the difficulties of switching as their reason to stay put. (Respondents were asked to choose more than one metric.) About 13 percent claimed that they stayed with their current bank because the others appeared to be just as bad.

Bobby Lane, head of Denver Chase International, the outsourcing operation of Shelley Stock Hutter, agrees that it can be difficult for FDs to distinguish between the main banks.

“Banks will tell you that they are not the same and they will spend millions of pounds on marketing to convince you that there is a massive point of difference. But you find that they offer largely the same facilities,” he says.

Neil Morling, CFO of built asset consultancy EC Harris, adds that it is how banks manage client relationships where the real difference in quality and value begins to tell.

“Banks are very similar, and they all raise their money from wholesale markets,” he explains. “The way they get FDs to change their banks is through the value of the relationship. Do they understand the business?”

Therein lies the problem. The fear for many FDs who are tempted to switch their main relationship bank is that the new bank will not understand their business in the way that the old one does. If a bank does not understand the business and has not been with the company through the good times as well as the bad, it could damage access to credit. Six percent of respondents believed that switching banks might hurt their credit.

Arif Kamal, group FD of GL Hearn, says that it is best to sit tight even when times are tough and the relationship becomes strained.

“One FD I know says they would like to switch tomorrow if they could,” he says. “They will not do so because the bigger threat is to move from a bank that they have done business with for 30 years that, although they have difficult times with it now, understands the business. The relationship with the bank is absolutely critical.”

The ability to understand the business relies as much on the quality of the relationship manager as it does the bank. The problem is that the good ones get promoted. Lane at Denver Chase says it is easy to be enticed away, but with the churn of relationship managers you wonder if it is worth the risk.

“Relationship management is coming back; people are more interested in relationships when changing banks. You meet someone who is great and who entices you to change, but you end up with a new team that is not as good and wonder if it is better staying with the devil you know,” says Lane. “If you do have a bad year, it is better to stay where you have good track record.”

There is also a scepticism that when you are enticed to switch banks by a smooth-talking salesman, the bank will fail to deliver on its promises whether the relationship manager changes or not.

“There is certainly that question about changing sales into action,” says Andy Blackstone, FD at M&C Saatchi. “We all meet sales people that promise a lot of things, but how often are those offers actually turned into reality?”

Along with the perception of many FDs that all banks are essentially the same and as bad as each other, a further 19 percent of survey respondents felt that switching banks would complicate transactions, while 13 percent thought the cost of switching was too high.

“The biggest hurdle is the inertia when it comes to changing,” says Tony Ratcliffe, FD of risk management software provider Brady. “The hassle of telling all your suppliers and changing all the direct debits puts you off taking action. The banks say it can all be automated, but in the same way that you know you can save a few bob by switching energy supplier, you are often left wondering whether it is worth the hassle. The real cost of switching is the time it takes and the general nuisance involved. But I don’t think there is not a real financial cost to switching.”

Lane agrees switching banks can become an “administrative nightmare” although the issue should not be blown out of proportion.

“It depends on what facilities you have got with the bank,” he says. “Some companies have quite sophisticated borrowing arrangements that require lengthy notice periods. If you simply bank with a current account with no other facilities, then you can change tomorrow.”

According to Blackstone, one of the main barriers to switching banks is technology.

“The technology barrier depends on how you have set up your accounting system,” he says. “Changing banks can mean that you have to change the set-up of your accounting software.”

But not all FDs agree that changing banks overly complicates transactions. Morling at EC Harris says that if you find the right partner who is willing to go the extra mile, switching accounts can be a pain-free experience.

“Ultimately, it is easy to move banks. We have just moved all of our overseas banking to one bank. The bank project managed the entire process,” says Morling. “You just need to talk it through with the bank and it can take you through the process. That is what brought the value.”