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Businesses Go Bank Shopping

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Lending to small businesses may be a rather unsavory prospect to many banks, but that doesn't mean they don't want your business. On the contrary, your deposits help strengthen their balance sheets and your day-to-day operations have a great big 'fee' sign hanging over them.

Traditionally, banking business from small and mid-sized firms is pretty sticky, meaning that once you set up your accounts with a bank, you probably won't leave anytime soon. According to consulting firm Greenwich Associates, historically, only about 10 percent of small and mid-sized companies switch banks in any given year.

But a funny thing is happening in the wake of the banking crisis: the percentage of smaller companies looking to make a change in their banking relationship is surging.

Over the past six months, 20 percent of mid-sized companies and 16 percent of small businesses have requested competitive proposals for a new bank, Greenwich found in a survey released this week.

And this trend has been going on for some time: The share of U.S. small businesses and mid-sized companies requesting proposals for new banks has been doubling every six months for the past year and a half.

The single most important factor driving the spike in RFPs over the past 18 months has been efforts to reduce banking fees, which, unfortunately, is a sign that the hard times keep on rolling. Still, it's a good sign that businesses are doing something about all the fees they get slapped with.

The next biggest driver of RFP issuance has been demand for more capital. But don't get too excited: Greenwich says other data suggests that this demand is slipping due to new worries about the strength of the economic recovery, especially among small businesses. The study found that 50 percent of small businesses issuing RFPs in the second half of 2009 reported a growing need for capital as the reason. That share fell all the way to 27 percent in the first half of 2010.

Businesses are equally fed up with the service they've been receiving and when (if?) capital demands really pick up, we can probably expect to see an even greater migration between banks. More than half of small businesses and 41 percent of mid-sized companies say it's harder for them to borrow from their banks now than it was a year ago. These difficulties help explain why one-third of small businesses issuing RFPs so far in 2010 say they are looking for new credit providers, as opposed to a new full-service provider. That's up from slightly more than a quarter in the second half of 2009.

My fear, however, is that by the time demand for capital really picks up, the banking industry will have further consolidated, leaving small businesses with even fewer choices, worse service and more ridiculous fees.

Last updated: Aug 12, 2010




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