Recently a small business owner observed that he paid triple the amount in banking fees for his business account than he did for his personal account, even though the number of transactions on both accounts were the same.
When he asked the bank about this anomaly he was told that business accounts are where the bank makes its money.
Nazeem Martin, head of small business financing house Business Partners, says the only time banks are keen to provide funding for small businesses is when there is an opportunity to obtain the transactional banking of the small business. ‘It is our understanding that transactional banking is where the banks make their real money,” says Martin.
Nobel economics prize-winner Professor Joseph Stiglitz says that financial institutions facilitate economic activity; they do not create economic growth. He was concerned that in the United States 30% of corporate profit came from the financial industry. (Finance, real estate and business services are the largest sectors in South Africa — at 19% of GDP.)
The point is that profits derived from transactional costs are a direct cost to business and reduce the economic output of other sectors. This is why banking costs for businesses, especially small businesses, which are the backbone of an emerging economy, are destroyers of economic value.
The Competition Commission banking inquiry last year highlighted the issue of banking fees and banks were quick to respond, and advertise, the introduction of fixed monthly fee options for individuals. But fees for small businesses have not been decreased.
Unlike big businesses, they are unable to flex their financial power to negotiate rates. Not only do they pay the maximum merchant service charges when customers transact with cards, but they are also unable to negotiate favourable transactional banking fees.
Small businesses are stuck in a no-man’sland between individual banking fees, which are scrutinised by consumer groups, and the financial muscle of big business.
When comparing business accounts with personal accounts, the ‘pay-as-you-transact” fees are mostly in line with personal banking fees, but a business cannot opt for a fixed-fee account.
Businesses generally make more payments because they need to pay a variety of suppliers. This becomes even more punitive for a small business when banks charge an ad valorem fee (a percentage fee based on the value of the transaction).
A payment to a supplier is generally far higher than the normal accounts paid from a personal account. FNB and Absa offer a flat fee (on certain accounts) and this works to the business’s benefit if the average transaction size is more than R500. James Fowle, head of FNB core banking, says it is impossible to provide businesses with a fixed monthly fee.
Although there is a natural limit to how much someone would transact on their personal account, depending on the business, a company could have thousands of transactions and therefore it is fairer to charge by transaction. ‘This is largely because there is a continuum of commercial banking needs, from a small spaza shop to a listed corporation, whereas there is a natural cap or limit to how much banking an individual can and will do in a month.
This makes it difficult to come up with economically viable options that will work for businesses,” says Fowle. He disputes the fact that commercial banking subsidises personal banking — they remain completely different units within the bank.
Although that might be true, all banks use the same technology platform for all their banking services and businesses pay a higher percentage for the infrastructure, thereby reducing the implied cost for personal banking.
Another aspect of banking costs that a small business needs to consider is the negligible interest earned on a transactional account. As with a personal transactional account, banks pay almost no interest on funds held on the account, but unlike personal accounts there are no fee-reduction incentives if you keep a positive balance.
A business tends to have far higher levels of cash flow and needs to manage its cash deposits better to maximise its interest. This could include moving funds to a call account or money market account, but a business also can’t afford to transfer on a daily basis because, unlike personal accounts, banks charge a fee for internal transfers ranging from R3.50 to R4.20, depending on the bank.