UK SME Card Usage Remains Strong (Source: CPI)

UK SME Card Usage Stays Strong

Publication Date: August 2011

UK SME demand for credit may have eased in recent months, helped by recovering economic fortunes; nevertheless, business credit card usage in the UK remains one of the primary ways of obtaining financing, as Victoria Conroy reports.

With around two million corporate credit and charge cards in the UK and a market well-served by several of the world's leading banks, UK SMEs have no shortage of options when it comes to payment cards. In fact, the UK small business credit card market is one of the strongest in Europe. While the recession severely restricted the availability of credit, which hampered SMEs' expansion plans, economic recovery also means that SMEs' demand for credit has dissipated in the last few months, if recent surveys are anything to go by.

UK Business Lending Trends

As of the end of 2010 there were around four million SMEs in the UK, defined as having fewer than 250 employees. Data from the British Bankers Association (BBA) shows that as of February 2011, there were an estimated 510,000 term loans (within some 3.9 million small business banking relationships), with a total outstanding value of £42.2 billion (US$69.3 billion) and overdraft borrowing standing at £7.6 billion (US$12.4 billion).

The level of total borrowing as of February 2011 (£49.8 billion, or US$81.8 billion) reflects a return to pre-financial crisis levels in 2008, as businesses have paid down debt and built up reserves in response to the financial crisis. The aggregate value of small business current and deposit accounts, restated on the basis of refreshed data from banks up to February 2011, is strong at £56.8 billion (US$93.3 billion), and the first two months of the year saw a continued monthly rate of around 50,000 small businesses establishing new banking relationships by opening their first account from a business product range. The BBA's data shows that lending trends appear stable, although it noted credit demand from small businesses fell sharply in the first quarter of 2011.

In its July 2011 Trends in Lending report, the Bank of England noted that the amount of lending to UK businesses contracted by around £4 billion (US$6.5 billion) in the three months prior to May, although this was partially offset by an increase in April, the first positive monthly figure for net lending since November 2010. However, credit availability remained broadly unchanged for businesses, according to lenders in the Bank of England's 2011 Q2 Credit Conditions survey. As is often the case, larger firms were generally able to access bank lending if required, but opportunities for smaller firms remained more variable.

Card Usage Trends

Despite demand for credit easing off, UK SMEs are still enthusiastic users of business credit cards. Recent surveys about SME business card usage indicate that on the whole, business credit cards are the most widely used financing tool for small and medium-sized businesses. A 2010 study, updated from data published in 2004 and 2008, by Warwick Business School found that UK SMEs spend in excess of £1.8 billion (US$2.9 billion) on business credit cards. The study, which was based on a sample of 2,500 companies, found that 55% of SMEs used business credit cards, 53% had overdrafts, 24% used term loans, and only 3% used equity finance during the period 2001-2004.

Source: Warwick Business School

According to the study, small businesses were generally able to find the financing they needed but often failed to secure the best possible terms for their borrowing. There is also a need for SMEs to have a safety net against short-term problems, reflected by the £4 billion (US$6.5 billion) net positive cash position of SMEs, who were holding £92 billion (US$151.2 billion) in total deposits, compared with £88 billion (US$144.6 billion) that they owed in loans.

Most of the business credit card spending by SMEs is for day-to-day bills, such as travel expenses and raw materials, although 12% of the study's respondents said they used their corporate cards to buy equipment and vehicles. Only a small proportion of the money spent on business credit cards is left outstanding at the end of the month. Businesses using personal credit cards pay off an average of 79% of these debts in full each month. For business credit cards, the proportion is 95%.

Although the UK small business lending market is dominated by the big four banks – HSBC, Lloyds TSB, Barclays and Royal Bank of Scotland, which serve a total of 82% of all SME banking customers in England and Wales – UK SMEs are not averse to shopping around for a better deal. Only 2% of SMEs change banks each year, but one in three expressed some dissatisfaction with their bank charges, which are on average £51 (US$83) per month. The average SME has been with their main bank for 15 years. Around 7% were considering changing banks, and 29% said they would move if approached by another financial services provider.

Another survey from Hilton-Baird Financial Solutions, which was published in February 2011 and drew responses from 700 UK SMEs, found that 44% of respondents use credit cards as working capital, despite the relatively high interest rates charged. However, this received a mixed reaction in small business circles, with insolvency practitioners Business Rescue Service describing the finding as "concerning at a time when we are seeing so many cases of company insolvency." According to Business Rescue Service, the problem is not that businesses should never use any form of credit – it's more the consequences of doing so either habitually or on a larger scale as a form of primary funding.

The newly launched SME Finance Monitor from BDRC Continental, published in July 2011, found that around 51% of surveyed SMEs are using external financing and that 19% of SMEs have had a "borrowing event" involving an overdraft and/or loan in the past 12 months. Almost all SMEs said they held some credit balances, either in deposit or current accounts. Based on those giving an answer, two-thirds held small balances of £5,000 (US$8,219) or less (63%), but this was because of the lower credit balances held by smaller SMEs. Among the largest SMEs, half had credit balances in excess of £100,000, or US$164,389.

Overall, 30% of SMEs had used external finance in the past five years and were using something now. Around 2% had used something in the past, but not now, and 21% had not used external finance in the past but were using it now. Almost half (47%) had neither used external finance in the past nor were they using it now, and this ranged from half of one-man bands to just 15% of the largest SMEs.

In relation to financing methods, credit cards ranked behind overdrafts, which were the most popular method of financing, and this was applicable across SMEs of varying sizes.

Source: SME Finance Monitor
na = not available

Only a minority of SMEs had applied for other forms of finance during this time, but most of those that had applied had been successful, with business credit cards receiving a 92% success rate in approvals.

Liquidity and Working Capital Trends

UK SMEs are generally in a healthy state as far as finances are concerned. In their 2010 SME credit and finance survey, the Association of Chartered Certified Accountants (ACCA) and the Confederation of British Industry (CBI) found that although the refrain "cash is king" was common throughout the recession, it is even more true in the recovery, with cash, liquidity and working capital needs now the main drivers of SMEs' demands for finance. Those with strong cash positions are less likely to need finance and more likely to obtain it if they apply.

The ACCA/CBI survey also found that in line with previous research findings, half of all SMEs surveyed (50%) reported that they had sought new credit or loans on commercial terms, and a larger share (62%) reported they had sought some form of additional finance, trade credit or funds over the last 12 months. Bank overdrafts were the most commonly applied-for type of credit, followed by credit from suppliers and bank term loans.

If anything, these trends mean business credit cards in the UK will face more competition from other forms of financing, including a shift towards trade credit (within agreed terms) and term loans, and away from overdrafts, a move which is already underway. It appears that larger SMEs are more likely to make this shift, which implies a lower amount of working capital, a higher amount of cash, or both.

But UK banks are certainly not being complacent about serving the UK SME market. In April 2011, Barclays announced the acquisition of MBNA Europe 's UK small business credit card portfolio, consisting of approximately 60,000 accounts and £130 million (US$213 million) of outstanding balances as of February 2011. And with this large segment still vastly underpenetrated by payment cards in general, banks in the UK will be ramping up their efforts to recruit more SMEs as card customers in the months to come.

Die Hard: Homegrown Banking Software

Die Hard: Homegrown Banking Software

Banks That Rely On Homegrown Software Are Often More Satisfied With Their Technology Capabilities Than Are Vendor-Dependent Banks.

Boston, September 20, 2011 – A new report from Aite Group examines the current penetration of homegrown technology at banks, globally by region. Based on a Q1 2011 Aite Group survey of 80 large financial institutions across North America, the Asia-Pacific, and Europe and the Middle East, the report provides comparative satisfaction levels with homegrown technology solutions, and explains why homegrown solutions garner such high levels of satisfaction in certain areas while vendor solutions are preferred in others. Some industry observers might find it difficult to believe, but homegrown software continues to be a favored technology option for some banks. In fact, about 16% of banks around the world continue to prefer building software in-house when they have the chance, and homegrown software receives a 65% net satisfaction balance compared with vendor software's 55%. Aite Group attributes this high rate of satisfaction at least in part to custom tailoring. Although homegrown solutions can be more difficult to maintain and upgrade, they may better fit the specific needs of the organization than an off-the-shelf vendor solution. Of course, satisfaction varies by solution type, and vendor solutions receive higher satisfaction marks in certain areas, such as anti-money laundering. "The expansion of the IT services industry is one of the factors behind the resilience of homegrown software development," says Gwenn Bézard, research director with Aite Group and co-author of this report. "The development of a low-cost IT services industry over the past decade, in particular in India and some former Soviet Union countries, has made it easier for institutions to custom-build software at a competitive price." This 22-page Impact Note contains 15 figures. Clients of Aite Group's Retail Banking and Wholesale Banking services can download the report by clicking on the icon to the right.

Trivia from travel: Can someone please...

...tell me why Lufthansa equipped it's planes with ASHtrays in the lavatory of you are not allowed to SMOKE?

(not that I smoke in the first place, but the conflicting messages intrigue me!)

lol

The 26 million Underserved Bank Customers

According to a recent report and an article in the American Banker, the bulk of 26 million small companies in the US are overlooked and underserved by American banks. A lot of them do not have business banking packages, but rather use consumer banking products and services.

This is the primary reason why we have developed a service to identify these customers by scoring consumer card spending patterns to identify typical business spend. The Business Spend Indicator enables banks to identify "hidden" small business customers, target them, and propose more adapted products and services.

Contact me should you wish more information about this opportunity.

Encouraging 3Q09 results for a number of large banks

The following article in the latest edition of the Retail Banker International is worth reading:

While total third-quarter net earnings at 20 selected banking groups rose by almost $2.5 billion to $30 billion year-on-year, there was a marked geographic bias – with the strongest performing banks based in the US, France and China.

Strip out JPMorgan Chase’s sixfold rise of more than $3 billion in net earnings for the quarter to $3.56 billion – driven by strong investment banking and asset management figures but hammered by underperforming retail and card units – and net earnings at 20 of the biggest banks to report third-quarter results actually fell (some banks, including HSBC, Lloyds and Standard Chartered, do not publish earnings for the Q3 period).

A rise in net profits of around 20 percent was seen at Bank of China, Industrial and Commercial Bank of China and China Construction Bank, boosted by a lending boom in the first half – although the rate of increase slowed slightly in the third quarter.

In a generally positive assessment, China’s banks said that net interest margins had stabilised and, looking ahead, forecast that lending would remain buoyant into 2010.

Among banks in Europe, Société Générale more than doubled its quarterly earnings, easily beating analyst forecasts, boosted by strong French retail banking revenue growth, declining provisions and a sharper than expected cut in expenses. Though analysts said there remained some pockets of concern, such as future loan losses in its consumer finance arm and further deterioration of credit risk in its operations in Russia and Romania, the cost of risk at group level has stabilised at 120 basis points.

Santander’s quarterly earnings of €2.2 billion ($3.3 billion) was down by only 3 percent year-on-year, and in an upbeat assessment, the bank reiterated its full year earnings target of €9 billion. At Barclays, although third-quarter net earnings fell by more than 50 percent, largely on losses on the value of its own debt and other one-off items, underlying earnings for the first nine months of the year more than doubled.

In common with HSBC, which said only that its underlying third-quarter profits were “significantly ahead” of a year ago, Barclays indicated that bad debts may have peaked.

Among the more positive developments of the reporting season was a sharper than forecast increase in underlying banking earnings at ING (net earnings of €499 million compared with a loss of €477 million in the year ago period), boosted by lower-than-feared loan-loss charges, strong fees and commission income, and lower costs, notably at ING Direct.

Credit losses peaked?

As for the fourth quarter, Bank of America, which reported a net loss of $1 billion, indicated that credit losses may have peaked, though its outgoing CEO, Kenneth Lewis, told analysts results going forward “are expected to continue to be challenging as we close the year”.

But the most marked uplift in sentiment for the remainder of the year was expressed by HSBC’s chief executive, Michael Geoghegan, who had expressed fears of a W-shaped double dip recession earlier in the year.

Boosted by an improvement at its troubled US consumer finance business, where bad debts fell for the first time since 2006, he said: “the biggest jolt has now passed through the global economy” and predicted a two-speed recovery, driven by emerging markets.

RESULTS
Q3 group net earnings at 20 selected banks, ranked by year-on-year change
	Q309 ($bn)	% change
JPMorgan Chase	3.56	571.6
Société Générale	0.64	137.0
PNC	0.56	115.3
Wells Fargo	3.23	96.9
BNP Paribas	1.95	44.4
Bank of China	3.21	22.5
ICBC	4.95	19.9
China Construction Bank	4.44	18.7
US Bank	0.61	3.4
Intesa Sanpaolo	1.01	0.0
BBVA	2.23	0.0
Santander	3.23	-2.1
Crédit Agricole	0.58	-7.9
UniCredit	0.84	-19.2
Barclays	1.80	-53.7
Erste	0.34	-72.5
ING	0.75	n/m
Citigroup	0.10	n/m
Bank of America	-1.00	n/m
Royal Bank of Scotland	-3.01	n/m
n/m = not meaningful Source: RBI

Merry Christmas

Les Echos, the French business newspaper, announced today that champagne wine makers have more than 1,3 billion bottles in storage. Yes, billions!

In other words, more than 5 years worth of sales, up from 3,6 years worth of stock only a year ago.

Cash flow problems due to recession have tempted some of the champagne houses to reduce prices significantly to increase sales, and for the first time this year you can find champagne for less than €10 per bottle.

My guess is that we are heading for a magnificent, less expensive festive season for lovers of sparkling, wonderful champagne. For consumers, that is, and not for the wine makers having to discount their precious, bubbly wine.

Customers' trust in banks rock-bottom

Aite recently published a survey of US, UK and French customers' trust in banks, and the results should receive top attention in banks' boardrooms.

The results show that trust is dramatically low, and that financial turmoil, banks being bailed out by governments, while others still insist on paying huge bonuses to employees of mis-managed banks, have contributed to customers loosing faith in banks.

When only 6-7% of customers, or 1 in 20 customers, give or take a few, in France and the UK express very much trust in their primary bank provider, I would be worried if I were a board director. Even more so if you look at the data for general banking trust, where hardly anyone has very much trust in banks, and only one in three (US) to one in eight (UK) customers somewhat trust banks.

Banks have a long way to go in re-building trust with their customers to get up to decent levels again. A first step would be to avoid negative press by ensuring that salaries are kept at decent levels, and that bonuses are paid only when achieving objectives that contribute to build shareholder value and customer satisfaction.