Smaller institutions receive favorable ratings.

Business owners polled about banking

Canada's small financial institutions continue to best meet the needs of independently owned businesses, according to a survey conducted by the Canadian Federation of Independent Business (CFIB).

The survey, a repeat of a similar poll conducted more than three years ago, gathered the opinions of 11,000 small- and medium-sized business owners across the country during the first three months of 1992.

CFIB members were asked to rate their usual financial institution as "good" or "poor" in five areas of service - interest rates, collateral requirements, credit availability, service charges and continuity of personnel.

The survey found that independent business owners continue to favor the performance of credit unions, caisses populaires, trust companies and other small institutions, while the "Big Five" financial institutions again occupy the bottom five rankings.

Although the results are generally consistent with past surveys, the rankings have changed slightly. Credit unions and caisses populaires have moved to top spot, gathering best scores in all five key aspects of bank service and collecting the only two "A" marks awarded. Other small institutions like Alberta Treasury Branches and trust companies also rank above average.

Among the "Big Five," the largest relative improvement in service was recorded by the Bank of Montreal, particularly in the area of interest rates. In past years the bank has consistently led the reduction in lending rates, and has recently established a special small business loan rate at half a percentage point below prime. Members have clearly found these developments to be encouraging and, for the first time in recent memory, moved the Bank of Montreal out of last place in the rankings of general satisfaction.

The largest decline in member satisfaction was recorded by what was once the "Big Five's" best performer, the Toronto-Dominion Bank. With two-thirds of its customers based in recession-ravaged Ontario, the TD bank has borne the brunt of member dissatisfaction over cutbacks in credit lines and the general tightening of lending terms and conditions.

On balance, the survey showed that ratings of bank performance have remained generally poor throughout the past three to four years. And, although the mix of concerns have changed somewhat, the overall conclusion is that no substantial improvements have been made.

Service charges are still the biggest point of contention. Sixty-seven per cent of small firms surveyed are dissatisfied with the levels and frequency of charges that are attached to even the most trivial bank transactions. Charging extra for account activities and unbundeling grouped services have been aggressively pursued as a financial strategy by the banks, making service charges one of the fastest-growing sources of bank revenues.

Not only do deposits, withdrawals, statements and other account-services cost extra, but business can be charged for credit reviews, which are "services" done entirely at the discretion of the institution.

Businesses are also often charged for "walking through the door" and simply making an application for credit. The inconsistency with which charges are applied make it very difficult for customers to compare the costs and services of various financial institutions. As a result, true competition in the banking industry is inhibited.

Dissatisfaction with high collateral requirements is still the number-two banking problem, according to the membership. Fifty-nine percent of the survey respondents consider their financial institution a poor performer in this area.

Previous CFIB surveys have found that, on average, a small business has to pledge $2.70 in security for every $100 borrowed - often in the form of personal assets such as houses or cars.

Also unchanged from the past survey are members' views on the continuity of bank personnel. Almost 44 per cent of members are dissatisfied with high personnel turnover in the banks.

This issue is of considerable importance to small firms because it affects all aspects of the banking relationship. In cases where turnover is high, businesses have been found to receive considerably less favorable lending terms and conditions, particularly higher borrowing rates and higher collateral requirements.

Notably, however, interest rates are now seen in a much better light. The impact of the drop in the prime rate to 7.5 per cent in the first quarter of 1992 from about 11.5 per cent in the last half of 1988, as a result of recessionary conditions, has meant a significant saving to many borrowers.

Unfortunately, the recession's counter-effect has been a severe cutback in the general availability of credit. Once the most positive element in small business and bank relations, the numbers expressed dissatisfaction with the lack of finance availability has climbed from 24 per cent in 1988 to 31 per cent in 1992.

Business owners in Ontario, however, are much less willing to give their financial institution a good rating. When regional economies run into difficulty, banks tend to respond by putting region-wide limits on credit - and what happened in Ontario proved no exception.

Ontario's high-flying economy of the late 1980s came crashing down in 1990 and 1991, leaving many businesses desperately short of cash.

The banking sector's broad-brush response only added to the problem. With little advance notice, loans were called and credit lines were suddenly cut back, making it impossible for many firms to continue - firms that might have otherwise been able to weather the downturn.

The lack of improvement in overall banker satisfaction among small- and medium-sized business operators during the past few years is disappointing. Tough economic times have forced many businesses to focus on service and performance to maintain their own place in the market. With the exception of some institutions, however, this trend has not carried through to the banking industry.

The essence of a good banking relationship is information. The more that a business owner and a bank know about each other, the better their relationship will be. Continuity of personnel appears to be an important element. If account managers are allowed to stay longer with particular clients, good information and good relations have the time to develop properly.

Continuity limits risk and leads to better credit terms on interest rates and collateral requirements. It also allows account managers to make decisions based on firm-specific criteria, instead of relying on industry-wide or region-wide generalizations that can be arbitrary or erroneous.

Banks are also encouraged to improve disclosure on the levels and scope of service charges, which are seen to be both excessive and arbitrary.

Small financial institutions have shown an ability and a willingness to react to small business concerns in the banking marketplace and they have been rewarded by high satisfaction ratings and high market shares for their efforts. It is hoped that the larger institutions can respond to the cue.

Ted Mallett is a senior economist with the Canadian Federation of Independent Business.