UK SMEs Hit by ‘Debanking’ and Poor Value from Major Banks

March 8, 2024

Currently, many SMEs in the UK are experiencing issues because of ‘debanking’. This means that their business accounts are being closed, they are receiving substandard services from the country’s leading banks, and their current and savings accounts have lower interest rates. Let’s analyse why this is the case and how smaller firms could benefit more in financial matters.

UK SMEs Receive Subpar Value

According to a recent study conducted by Savings Champion, small and medium-sized enterprises (SMEs) in the UK are not getting the best terms from the country’s major banks. Researchers revealed a persistent problem with businesses being offered less favourable interest rates on banking products compared to individual customers, with few exceptions. 

To be more precise, the study found that business current and savings accounts at large UK banks tended to offer lower interest rates. Other than the special Instant Access (Business) Account, which offers 1.50% on balances over £5,000, business accounts generally earn lower interest than retail accounts. Today’s industry norm is not high, ranging from 0.06% to 1.1% for a £10,000 deposit across various banks.

The study highlights the growing awareness and dissatisfaction of UK SMEs with the services provided by large banks. The authors state that there’s an emerging opportunity for challenger banks and FinTech startups to redefine value and service standards in the industry. But why did this capacity constraint come about, and how can it be reflected in the numbers? Let’s look at the statistics in detail.

Debanking: More Than 140,000 Small Business Accounts Were Closed in 2023

Major UK banks closed just under 142,000 UK small business accounts last year, according to Treasury figures. The Treasury committee found that eight major banks closed almost 3% of the 5.3 million small and medium-sized business accounts in 2023. MPs are raising questions about why lenders are debanking risky customers.

Reasons given for the debanking of businesses include risk appetite, financial crime concerns, and lack of information-sharing. 

In many cases, a bank closes an account because a business has failed to fulfil verification requirements or has not responded to the bank’s attempts to contact them. Just as often, banks use the efforts to avoid potential exposure to financial crime as a reason to explain why they provide little or no information to their clients about the reasons for closing their accounts. Their explanation is that the law prohibits them from “tipping off” criminals.

However, in a separate report, the All Party Parliamentary Group (APPG) on Fair Business Banking and Finance said that banks are closing accounts mainly because of cost and reputation rather than fighting financial crime.

How Experts Comment on the Current Access to Finance for SMEs

Anna Bowes, co-founder of Savings Champion, expressed her point of view on the research findings, emphasising that businesses face unequal treatment in terms of the interest they receive on their cash reserves. Bowes advised businesses to consider transferring excess cash into savings accounts for potentially higher returns. However, she cautioned against expecting a significant benefit from traditional high-street banks.

Expressing concern about the way the UK’s big banks treat SMEs, some representatives of UK FinTech companies and challenger banks have entered the debate. They are calling for a new standard of value and service tailored to the needs of enterprises. This includes a transparent fee structure and financial incentives to maintain a positive balance, which may be key benefits of innovative current accounts for businesses.

Chair of the Treasury Committee, Harriett Baldwin, said that one of the most striking and frustrating findings of the research into access to finance for SMEs is the willingness of lenders to close companies’ bank accounts with little or no warning. The Committee believes that any company doing legitimate business in the UK should be able to find a bank that will offer it an account. 

A spokesperson for the Treasury Committee added that three of the eight banks listed a total of 4,214 account closures that clearly fall under the definition of “risk appetite”. The fact that only three lenders included risk appetite in their criteria indicates that this reason may not be systematically recorded. Because of this, it is not always clear whether decisions to debank certain businesses are made based on “official” risk exposure concerns.

Experts hope that the publication of this data will help to scrutinise the decisions made by banks and ensure that legitimate businesses are not treated unfairly.

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As a startup ourselves, we aim to help aspiring entrepreneurs, freelancers, and SMEs control cash flow and manage payments by offering paperless global money management tools. Importantly, we guarantee a high level of data and asset security.

We have many features that you may find useful, so we invite you to explore all of your options and determine the benefits of using our services. Payrow will definitely help you automate your business processes and accounting with the following:

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If you would like assistance in managing your small or medium-sized company, we encourage you to visit our website to learn more about our services.

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