Banking rivalry is good news for customers

High street banks face growing competition from building societies and online banks. By Wilf Altman

Over a friendly lunch to meet the bank's new relationship manager, the owner of a well-established small business (and a long standing customer) couldn't resist a gripe about the bank's high charges and enthusiasm for returning the occasional cheque.

Over a friendly lunch to meet the bank's new relationship manager, the owner of a well-established small business (and a long standing customer) couldn't resist a gripe about the bank's high charges and enthusiasm for returning the occasional cheque.

"If an account isn't conducted properly," the young manager pointed out, "we may not want the business any longer and we'll have no hesitation in telling the customer to go elsewhere."

Odd, the businessman thought. Relationship managers are surely there to develop good relations. Yet their more important function, he discovered, seems to be to win new business - even if it means losing customers. That's what they do when you try to call them and their voicemail says, "I'm out with customers, please leave a message and I will try to phone you within three hours."

High street banks say they want small and growing business customers. Like the Treasury, they see SMEs as an engine of growth. They give the impression that they are all in fierce competition to win such accounts. Walk into any branch and the business manager will roll out the red carpet. But beware: if your firm's last three or six months' bank statements look anything but healthy, or you need overdraft or loan facilities fast, the first reaction isn't likely to be too enthusiastic.

Your company's experience of banks probably depends on whether you are generally in credit, in which case the bank will persuade you to take out a loan for new development, new plant or equipment, or whether you are more often overdrawn, in which case you're in the bank's bad books.

But now the big four banks face increasing competition from building societies and online banks that want your business and will offer attractive deals. Lloyds TSB, for instance, offers 4.75 per cent interest on its Classic Plus account, compared with 0.1 per cent on bank credit balances.

Alliance & Leicester, named Best Business current account provider by Business Moneyfacts for the second year running, offers a business current account with free direct debits, standing orders and ATM withdrawals. Alliance & Leicester pays a monthly interest on balances at 2.2 per cent below their base rate. Its lack of a branch network, to compare with the big four can be a drawback, but cash or cheques can be paid in at any of the UK's 16,500 post offices.

The Co-op's Clarity Business Banking account charges a fixed fee of £15 per month. All fees are frozen until 2007 and interest of 2.5 per cent is paid on credit balances. Cash banking can be conducted at Co-op branches or post offices. To open an account and apply for an early overdraft or loan, the Co-op bank expects to see a copy of your business accounts for the last three years, a list of debtors and creditors, copies of your last six months' business bank statements, projected income and expenditure and an assets and liabilities profile.

Accountants make the point that another reason why more small businesses are changing banks, besides excessive charges, is that branch managers now tend to change at least every three years. Where a previous bank manager might have had a good understanding with a customer, his or her successor might be less well disposed, or show less understanding of the particular business. Local managers might be up against a regional ruling to restrict lending to firms in a particular sector. Or, there is a lack of confidence that a business in temporary distress has a chance of recovering.

High charges are clearly a key factor why more customers are keen to change. The recent survey by Which?, the Consumer Association's magazine, found that the four main banks each charge £30 for cheques that bounce and standing orders that couldn't be paid. It also found that they take £3bn a year in charges for unauthorised overdrafts - a charge which led to banks' chief executives being questioned and criticised by the Commons Treasury Select Committee last October.