When it comes to Small Business…
Have you ever been subjected to a lousy experience in dealing with your bank on a personal or business matter? A certain percentage of the Canadian population definitely has had some frustrating encounters at one time or another. But how do our vaunted financial institutions stack up against one another in aiding small to medium sized enterprises – the core of our national economic engine? Keep in mind that SMEs account for nearly six out of every 10 jobs coast to coast.
The Canadian Federation of Independent Business is a foremost authority on business activity here in Canada. In an exclusive interview with two of their senior leaders, we found some very interesting details about the evaluation Canadians have placed on their experiences in dealing with our various financial institutions.
Credit unions continue to outperform banks when it comes to serving the financial needs of small and medium-sized enterprises, according to the extensive research report issued by the CFIB. Almost 13,000 business owners were surveyed, providing insightful and direct feedback from the clients themselves.
Four Ratings Categories
Four primary categories were taken into consideration when assessing bank ratings. First, there was financing and the willingness of the institution to lend. Next were the level of fees, followed by interaction between the business owner and the account manager and finally the overall service rendered. Among the big five banks, the Bank of Montreal (BMO) and Scotiabank were tied with the highest overall rating – CIBC the lowest – again. Only HSBC and ATB Financial of Alberta rated lower than CIBC, which came as somewhat of a surprise given that those two institutions placed second and third overall in the last research report.
“Banks need to pay close attention to the report’s findings if they are serious about serving the small business market,” CFIB vice president of research Doug Bruce tells CBJ. “Overall, credit unions do the best job of serving entrepreneurs, while Scotiabank and BMO are tied in receiving the highest overall scores among the big banks. CIBC is the worst big bank for small business – that’s the same as it was in 2010, when we issued our previous banking report.”
CFIB president and CEO Dan Kelly essentially echoes the remarks made by his colleague Bruce.
“The main reasons behind it – and the data supports this too – is the personal connection to the institution,” he relates. “There are fantastic lending managers and account managers in all the institutions out there and there are also some bad apples in all the institutions but a customer of a credit union is more likely to feel that their customer account manager has an understanding of their business and of their personal circumstances. They are also more likely to have visited their client’s business.”
It’s true that the large banks have local presence in every town and city as well, so there is easily the argument that they are serving local interests as well as the smaller institutions. The differentiator may be more along the lines of where the corporate directives are coming from.
“It’s the fact the decisions are made locally that is the importance piece,” Kelly adds when pointing out the differences between credit unions and the big banks.
In addition to providing bank scores by size of business, CFIB’s Battle of the Banks includes a wealth of information including SME market shares of the banks, and policy recommendations. The bank scores are based upon those nearly 13,000 survey responses from small business owners. Very small micro businesses are classified as having less than five employees. Small businesses have between five and 49 employees while medium-sized enterprises consist of 50 to 499 employees.
Battle of the Banks
Battle of the Banks shows a disturbing trend: the smaller the business, the lower the overall banking score. Compared to larger businesses, smaller firms have a consistently tougher experience in getting the financing they need from their bank.
“Access to affordable financing and banking services is essential for hard-working entrepreneurs, and it’s clear that all of the banks should do more to serve small business clients,” says Kelly. “I strongly encourage small business owners to visit the CFIB website and find out how their bank performed in our report.”
Credit unions generally come out on top but this time they came out on top on all the size categories so they’re doing the best job in servicing the very small, small and mid-sized businesses.
“My best guess on that is that credit unions are set up quite differently with different objectives,” Bruce notes. “The main reason is that they’re locally based and locally run. So for example their board of directors will be made up of business people that are based and have their own business in the local community and that provides the credit union with a competitive advantage I’d say.”
One of the notable conclusions that CFIB arrived at from doing these types of extensive research studies is that it’s the direct connection a bank or a credit union has with their small business client that proves to be the main differentiator. It’s all at the level of the account manager handling a file.
“What happens with the banks is that they replace that person quite frequently, and in fact too frequently,” Bruce declares. “It’s still a personal relationship. If you do away with that face to face or change the face of the bank that’s dealing with the business client that person at the bank is always starting from ground zero.”
With such a less than ideal situation it’s not hard to imagine that certain information goes missing and a number of potential opportunities may be missed because the account manager doesn’t fully understand the needs and expectations of the business client. The account manager turnover is much lower with credit unions and the people running the credit unions already have that competitive advantage because they do know the local business community.
CIBC Continues to Drop
CIBC has done extremely poorly in the past two surveys conducted by CFIB when it comes to the small and very small enterprises, but they fared best at serving the mid-sized companies three years ago. But, that was three years ago. The poor results it posted with small companies has led some financial observers to speculate as to whether or not CIBC really even wants to be dealing with small business at all, or if they’d prefer to cut that opportunity altogether and focus on the bigger businesses. But that notion may have gone out the window with the latest results where they also plummeted with mid-sized businesses. It could be that the competition has gotten that much more robust.
“If it’s intentional it’s an absolutely terrible strategic move,” Bruce says. “If the owner is happy with the service they’re getting, chances are that same owner will bring over their personal accounts and that of their spouse and children and friends. It’s kind of a package deal. CIBC was at least doing something right three years ago when we did a similar study, but this time out it looks like they’re doing poorly,” Bruce states. “They get the lowest score among the big banks in serving all sizes of SMEs whether it’s very small (micro), small or mid size.”
Kelly was even more direct and certainly wasn’t mincing his words on what he believes is happening in this regard.
“Our view is that CIBC has a deliberate strategy to pull out of small business lending,” he candidly says. “They’re not saying that, but all of their actions suggest that they are focused on wealth management and other business ventures rather than servicing small and medium-sized firms.”
The financing number on the CFIB research report seems indicative of Kelly’s claim, whereby CIBC fared very poorly.
The CIBC numbers also reflect the bank’s downward trend in market share. CIBC once battled RBC for the honour of being Canada’s largest bank in terms of assets. As of now, CIBC has dropped to fifth place overall, surpassed by Scotiabank, Bank of Montreal and TD Bank.
“The banks don’t measure market share the way we do,” Bruce continues. “We take a very simple definition based on the number of small business clients. It’s a different perspective on market share and it’s kind of unique. It also goes back to 1989. We do have a neat trend line and you can see CIBC has come down from close to 20 per cent national market share for the SME sector to about 10 per cent.”
“We’re providing banks with invaluable information about their small business clients.”
The overall losses in market share from CIBC and even RBC has meant gains for other banks, including Scotiabank and TD. After all the data is collected, analyzed and reported on, executives with the CFIB attempt to connect with the CEOs at each of the financial institutions to discuss the findings.
“What I’ve noticed over the last two or three studies is that there’s a very good sign they really take this seriously and they do have lots of good questions for us,” Bruce relates. “CIBC has made mistakes in the past. There was a major strategy decision probably around the year 2000 that they were treating a lot of their small business clients as individuals or on the personal level.”
In other words, small business clients weren’t getting the maximum tailored service benefits from the bank. That was the major turning point with CIBC in terms of market share plummeting and also a decline in overall service.
“Over the years the overall banking sector has woken up and actually most I would say have taken good healthy strides in helping to serve the SME sector better,” Bruce offers. “It’s not quite what it was in the early 1980s or early 90s, so overall I would say improvements have been made but when you compare one bank to another CIBC fares the poorest.”
So what is more important for the average small business owner: lower fees and better rates on money lending that may be lacking some of that personal touch – or having a dedicated account manager and associates who provides excellent service?
“I think it’s a package deal,” Bruce responds. “Financing is a bit trickier because the small business owner is not always looking for a bank loan or an increase in their credit line. I think it’s really about how they’re being treated but when you do need the financing it’s super important.”
Part of the attraction to credit unions is that down homey feel being far more regionalized with local mandates. But some have grown to the point they may want to branch out beyond their current reach. Federal financial regulations went through changes last summer, which could potentially make that easier for credit unions to do by moving out beyond their provincial borders. That had been keeping them local by definition. It’s a matter of whether that would be benefit or hinder their overall performance with customers to expand in this manner. It’s not something likely to gain a whole lot of momentum according to Bruce.
“We don’t see that happening in a big way,” he tells us. “It will take some time. The competitive advantage of the credit unions is that they’re locally based which may be at odds in going with the strategy of expanding across provincial borders.
“In the past, as you grew from say micro small to small and then to medium sized, you may have outgrown your credit union because they weren’t able to help with foreign exchange or a variety of other senior level banking functions where you’re doing business inter-provincially,” Kelly adds. “One of the things I found interesting about this report is that medium sized members rated credit unions most highly as well, and that wasn’t always the case.”
Expansion of Credit Unions
Credit unions have expanded their scope and depth of services thus allowing them to be better equipped to assist small businesses.
Kelly is of the belief credit unions could potentially lose their roots by growing too large, but also notes that doesn’t have to be the case with proper planning and execution.
“The size can be an inhibitor to local decision making but at the same time, if structured properly we don’t think that there’s any reason why credit unions or some of the majors can’t have terrific help as a business grows and moves up the food chain but still offer really good on the ground service,” he says. “Of the big guys, Bank of Montreal and Scotiabank do a much better job than the likes of the CIBC, which has been dropping like a stone for years within our membership ranking.”
The two big position changes in this most recent research study came with HSBC and ATB, which is run by the Alberta provincial government. HSBC went from being the second-highest level of satisfaction amongst respondents in 2009 to the second-lowest this time around. ATB went from No. 3 last time out to the absolute bottom at No. 10. Lots of farm members in Alberta use ATB.
“That was a real shocker to me because ATB had been so positively reviewed by our Alberta members for so long,” Kelly states. “Recently HSBC did scale back their Canadian operations so it doesn’t surprise me quite as much that they dropped. I think it’s a direct result of a business choice that they made. ATB we’re still trying to figure out why they dropped so dramatically. We’ve been using the same methodology for a number of years now.”
Our banking system is often lauded for its solid rules and regulations which largely helped to insulate Canadians during the tough global economic downturn that began in 2008. You can say it was strong leadership at the top, and all those high-paid CEOs, but they were forced to comply with the rules and regulations set forth by the federal government.
“One of the reasons our banking system was more shock-proof during the recession was that we didn’t allow them to merge and something we had actively lobbied for,” Kelly says. “We had a pretty big war with the banking industry a decade or so ago on that issue. We think there would have been a very different outcome had banks been able to merge and then start to pursue big international plays.”
By Angus Gillespie