The Nasty Truth Of Small Business Banking

Cross-border payments firm Money Mover came out with some controversial, if not intriguing, research this week. In a study conducted by payments consultancy firm Accourt, analysis revealed that small and medium-sized businesses in the U.K. are spending nearly $5.8 billion in hidden cross-border payment fees to their bank each year.

On top of that cost, Money Mover’s research said that analysts found it difficult to pinpoint exactly how much the Big Four banks — Lloyds, RBS, Barclays and HSBC — charge to SMEs for cross-border payments because their fee structures are so opaque.

At least one bank, Barclays, has come to the defense of the banks, arguing that it “wholeheartedly” disagrees with the report’s conclusions. But Money Mover CEO Hamish Anderson, who comes from a banking background himself, says that the findings reveal some troubling habits in small business banking. PYMNTS discussed the research with Anderson and its implications for SMEs across the U.K.

Uncovering A Problem 

There is much discussion in the U.K. about the small business lending gap among mainstream financial institutions. In this discussion, one may believe that the biggest — and only — losers of this issue are the SMEs that need bank loans.

But banks are failing the businesses that aren’t interested in loans, too. According to Anderson, banks primarily make money off SMEs by those loans. When a small business doesn’t need financing, the banks don’t make money and, therefore, have little incentive to offer top-notch services — namely, international payments.

“These SMEs don’t generate a huge amount of revenue for banks, and they don’t qualify for the kind of terms they should be getting on things like their international payments,” Anderson said.

Money Mover first began to realize that this was an issue when onboarding its own small business customers. Through anecdotal and casual analysis, Anderson explained, Money Mover revealed that, on average, its SMEs were paying about 2.7 percent for international payments with their banks. One small business was even paying a 2.5 percent rate to simply move funds internally and had no idea that these fees existed, the CEO said.

With Accourt conducting formal analysis, Money Mover concluded that, on average, SMEs are paying about a 2.43 percent rate to make a £50,000 payment transfer into euros.

“That could be reduced if an SME shopped around and found an alternative service provider,” Anderson said. “It could easily cut that cost in half, if not beyond that, which means another $1,000 or $2,000 back on their bottom line, rather than disappearing into the bank’s balance sheet.”

Is Blockchain The Cross-Border Savior? Not Necessarily 

This past year, financial analysts and FinTech innovators began zeroing in on new technologies — like the blockchain — often applauded as the solution to cross-border payments friction and cost.

Major banks have begun investing in this technology, too. But according to the Money Mover CEO, this investment is far from a signal that banks are planning to get on board with the blockchain.

“Ninety percent of the international payments that are made by U.K. SMEs are made through their banks,” Anderson said. “It’s a big market; it’s a big revenue generator for the banks. There is very little incentive for them to improve and disrupt whatever they’re doing.”

[bctt tweet=”‘There is very little incentive for banks to improve and disrupt whatever they’re doing.'”]

Instead, he explained, banks are placing small investments in this space in an effort to explore blockchain and open ledger technology to develop their own ledger technologies internally in order to keep cost savings and efficiency gains within the institution, without channeling those savings down to the end customer.

“Where we can have any reliable and trustworthy, credible structure around blockchain, which allowed us to make transactions and have them immediately verified and reconciled, it would not only remove the revenue that banks generated but also their control,” Anderson said. “It would show that there is a reliable and trustworthy alternative to using their slow, outdated and expensive infrastructure.”

Anderson admitted that this does sound a bit like a conspiracy theory. “But banks have every reason not to invest in the development of the blockchain,” he said.

Knowing Your Choices

One of the key components of Money Mover’s report was that banks are not only charging excessively for cross-border fund transfers to SMEs but are not sufficiently transparent about these fees.

“My feeling, and my concern, is that foreign exchange is one of the few areas left in banking where banks are not required to be as transparent in their pricing as they are in some of the other areas in the service they provide,” Anderson explained.

[bctt tweet=”‘FX is one of the few areas left where banks are not required to be as transparent.'”]

This means that small business owners may not be shopping around for cheaper FX services, simply because they have no idea they should be.

“It surprised me how few businesses are aware that there are alternatives to using a bank,” Anderson said of his experience discussing the issue with Money Mover customers. “I think there’s an education issue here.”

This lack of transparency is what Anderson said Money Mover hopes to combat. “We try to give people the information they would have available to them in any other kind of financial decision,” he said. “We’re trying to present it to them and allow them to make a decision based on facts, rather than on a limited amount of information.”

The CEO emphasized that he is not out to bash the mainstream financial institutions. Anderson launched Money Mover after working at HSBC, where he served as head of prime services sales for Europe. Before that, he worked at Bank of America Merrill Lynch.

“I have no axe to grind about banks,” he assured. “We use banks and use bank infrastructure for the work we do; they’re still a vital part of the financial sector that we rely on, and people still trust the banks.”

But, he said, transparency needs to improve, and SMEs need to be open to alternatives. At the end of the day, banks are businesses, and business is all about making money.

“You have to be of a certain size and value to the bank before they start giving you access to deals and pricing that you would want to be getting,” Anderson stated. “And the difficulty is with small and medium-size enterprises. They tend to be so diverse and have such a range of requirements that banks find them very difficult to understand and to manage — and very expensive to manage as well. It’s not really worthwhile having a dedicated relationship with those companies of that size.”