Introduction
A revised of the literature relating to the business banking/SME space shows that while banks are conservative by nature and income focussed, SMEs are entrepreneurial by nature and outcome focussed. This variation in focus demonstrates a fractured relationship with a clear need for more highly developed levels of understanding by both parties. However, banks, due to their structure, size and power-base are better positioned to lead the existing nexus into a new paradigm.
The Chief Executive of the Australian Bankers Association (ABA) believes that banks have demonstrated success during recent years in that they have increased their profits by significantly reducing their operating costs and increasing the supply of electronic banking services. (Bell, D. in Wellard, H., 2005) He reinforces his stance by referring to the strong demand for loans and financial products (Bell, D. in Wellard, H., 2006). Kirkwood & Nahm confirm Bells’ assertion that the major banks have improved their profits and stock prices through operating efficiencies. (Kirkwood & Nahm 2006).
However, the East & Partners Customer Sentiment Index shows that Australian SMEs gave all 11 major Australian banking organisations, including the ‘Big Four’, an average rating of just 43.7 out of a possible 100; revealing a ominously low level of satisfaction by banks’ customers in this business customer segment (Knezevic 2006).
Loyalty
American research indicates that while banks pride themselves in their levels of efficiency, this efficiency does not necessarily produce satisfaction or loyalty. In fact, large banks regard only about 15 per cent of their customer-base as loyal. (Teller Vision, 2007). Liam McGee, President of Global Consumer and Small Business Banking with Bank of America maintains that loyalty is fuelled by innovation that is responsive to customer issues (Cline 2006). While commoditisation may be convenient for banks, it is not welcomed by customers, whose satisfaction is driven by a combination of speed and relevant content (James 2003).
There is evidence that Australian banks spend many millions of dollars attempting to lower the costs associated with customer service by automating the maximum number of processes. This, ironically, is balanced by outlaying millions more dollars on advertising focused on convincing customers that they are important (burningpants 2006).
Because the banking industry tends to neither innovate in the accepted manner of the word nor attend to the question of loyalty, it finds itself grappling with commoditised products, customers who expect more from their financial relationships and an inverted yield curve (Adams et al, 2006). This position is reinforced by Moutinho and Phillips whose Scottish research established that the degree of rigidity embedded in the banking industry’s planning, implementation and control actually hampers overall performance (Moutinho & Phillips, 2002).
SME Entrepreneurship
Entrepreneurship is about people who do more than create new ideas, write business plans, arrange finance and sell their products or services to make profits. Entrepreneurs add value through innovation, co-ordination of resources and the assumption of risks (Alizadeh 2003). SME Entrepreneurs are bold individuals who often perceive opportunity where others do not. They accept calculated risks and interact with others in order to organise resources (Alizadeh 2003).
The magnitude of the effort required to start a venture often gives the business priority over everything else in an entrepreneur’s life. If he or she fails, the experience can be shattering. The risk is personal. It relies to a large measure on confidence and is often strongly internalised (Liles, 1974).
Wilson Harrell identifies ‘Entrepreneurial Terror’ as a largely misunderstood condition frequently associated with the operation of a SME. ‘Entrepreneurial Terror’ is not just about money; it is a fear of failure and a fear of passing into oblivion without leaving a mark (Harrell 1987). Entrepreneurs usually live in a climate of higher than comfortable levels of risk which are elevated by types of bank financing secured against private possessions which can lead to an entrepreneur, operating in the SME sector, fearing a lethal combination of both high levels of risk and high levels of potential loss (Harrell 1987).
Drucker maintains entrepreneurship is neither magic, nor mysterious. Instead entrepreneurship is a discipline that can be learned (Drucker in Kuratko & Hoggetts 2004). He tends to regard entrepreneurs as an amorphous group. Broadly speaking, banks agree. Instead of recognising the small-business sector as a collective contributor to financial returns and jobs in the banking sector, SMEs tend to be looked upon critically by banks and regarded as isolated economic units (Hjorth & Johannisson, 1997) and as ‘necessary evils’ in the highly structured banking business.
SME Entrepreneurs & their needs
There are difference types of entrepreneurs, each with different needs. Cunningham & Lischeron (2004) identify six types:
- Great person
- Psychological
- Classical
- Management
- Leadership
- Intrapreneurship
(Cunningham & Lischeron in Kuratko & Hoggetts 2004 p.37)
They regard each of these types of entrepreneurs as possessing different characteristics, styles, measures and principles (and by extension needs). It would be difficult to align all six sets of these entrepreneurial types with commoditised, financial bank offerings based upon such simple banking requirements as speed, volume and cost. Knox and Markland speak of the capacity to service such diversity as the ability to move from specific, transactional events in time to a mutual commitment between supplier and customer (Knox & Markland 1998).
SMEs and entrepreneurialism are inexorably linked with an individual’s personal characteristics, personal environments and personal goals as they interact with viable business ideas and relevant business environments (Kuratko et al 1997 in Kuratko & Hodgetts 2004 p.130). Rather than aiming for Hjorth’s understanding of a managerial environment which is so well understood by banks, (Hjorth & Johannisson1997) entrepreneurs are ideas people seeking their own versions of success.
According to Professor Kosmas Smyrnios, Director of Research at RMIT University’s School of Management, while 89 per cent of start-ups rely upon personal savings only 28 per cent opt to give up equity in order to expand (Smyrnios in Searle 2007 pp. 38-41). Entrepreneurs typically avoid taking on equity partners because of anxiety associated with diluting equity. However, Smyrnios notes that they do favour some form of external financial backing, possibly in the form of HECS-like (Higher Education Contribution Scheme) loans that could be repaid when a company reaches a stage of profitability (Smyrnios in Searle 2007 pp. 38-41).
Although SMEs experience high failure rates during early years, careful planning appears to produce much higher rates of success. Most respondents in a collaborative
research study undertaking by BRW magazine and Professor Smyrnios (‘The Fast Starters’ survey), reported spending between one and six months in planning before establishing the company. Nearly a third began business with a planned exit strategy and more than 60 per cent updated their business plans either continually or quarterly
(Searle 2007 pp. 38-41).
Even so, nearly 30 per cent reported suffering major setbacks due to poor planning (Searle 2007). This high percentage of negative outcomes generates concern in the highly structured minds of bankers. However, it also points to an opportunity to provide some form of non-traditional funding, possibly along the lines of HECS, the provision of business education during the growth process and/or the bank taking a position in the enterprise.
Benefits to Banks
One of the benefits to banks ‘teaming-up’ with successful entrepreneurial operated SMEs is the fact that entrepreneurial operated businesses are capable of extraordinary growth. For example, Gas Pex Australia Pty Ltd showed a 13,453% increase in revenue in a single year; growing from $5,721 in 2004-05 to $775,412 in 2005-06 (Forrestall 2007).
Another benefit is the potential for growing successful businesses from relatively low cost start-ups. In 2004, 23 year-old Andrew Northcott started a labour-hire business, Labour Solutions Australia (LSA) with just $800. LSA generated revenue of $51,229 in 2004-05 and $595,509 in 2006-07; a growth rate of 1,062%. Projected revenue for the year 2007-08 is $5 million (Forrestall 2007).
Benefits to SME’s
However, SMEs do not just want the money to fund their start-up and grow their businesses; they also seek special understanding and information/knowledge. The expansion of entrepreneurial businesses is often limited by personal factors. While entrepreneurs are prepared to take risks, they tend to experience difficulties in getting the right people around them. As an example, 30% reported suffering from burn-out which they said could have been prevented by hiring the right people earlier (Smyrnios in Searle 2007 pp. 38-41). A number also mentioned the usefulness of having Boards and/or people around them to provide them with advice and give them more time to work on their businesses (Searle 2007). Some noted the value of listening to older, more experienced advisors (Forrestall 2007). Almost two thirds of ‘The Fast Starter’ survey respondents reported using professional coaches, mentors and advisers (Thompson 2007).
‘The Fast Starters’ survey also indicate that entrepreneurs are capable of detailed planning but require specialised financial backing together with a measure of experienced mentoring if they are to successfully move through periods of rapid growth (Smyrnios in Searle 2007 pp. 38-41).
Beyond the finance most of these potential clients require the comfort of knowing that behind the scenes is a human banker who can unravel mistakes, solve problems, serve as a sounding board and help plan for the future (Motley 2007).
Conclusions
It could be concluded that current business banking practices and the requirements of entrepreneurial SMEs are likely to be misaligned to the extent that relationships are not entered into, are not maximised when they are entered into or D negative outcomes are experienced from well-intentioned relationships.
Information technology, if used correctly, may provide banks with the opportunity to extend their reach and provide a wider range of enhanced and/or individualised products and services (Hawk 2002). However, electronic commerce could also expose banks to significant competition from both banking and non-banking entities (Hawk 2002). In other words other entities may seize the opportunities for a profitable relationship with entrepenurial SMEs’.
On the other hand, emerging developments within Business Process Management (Levinson 2006) may force collaboration and, by default, provide a better understanding of both banks’ and SMEs’ real needs to each other (Feig 2007).
There is an opportunity for future research to explore this dichotomy with a view to identifying a more mutually beneficial business model. This may include a clearer understanding of both financial and non-financial entrepreneurial needs by banks, a more transparent method of operating by entrepreneurs and the acceptance of additional methodologies by both parties. |
