Battle of the Banks. Research May How SMEs Rate Their Banks. Introduction

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1 Research May 2013 Battle of the Banks How SMEs Rate Their Banks Doug Bruce, Vice-President, Research Queenie Wong, Senior Research Analyst credit unions outperformed all the banks in serving the small- and mid-sized enterprise (SME) market in Among the big five banks, the Bank of Montreal and Scotiabank received the highest overall scores from their SME clients while CIBC scored the worst. Although HSBC treated SMEs relatively well in the past, latest bank scores indicate a sharp contrast. Introduction Small and mid-sized enterprises (SME) require a service-oriented banking sector committed to helping support their daily operations, future prosperity and growth. Whether it is providing daily banking services or financing necessary for growth and expansion, the banking sector plays a vital role in supporting How do banks, credit unions and caisses populaires (all referred to as banks, hereafter) compare when it comes to serving the financing and banking needs of their smaller business clients? To answer this important question, CFIB asked business owners how they viewed their banks. Through a survey of 12,877 business owners, this report provides a unique insight and rating of the banks based on direct feedback from their actual clients. In addition, information on bank financing trends is provided. This includes various data on loan amounts, lending terms, and loan rejection rates. Market share trends for SMEs during the past several decades are also provided to gauge bank performance over time. Given the specific geographic nature of some banks, market shares are also provided on a regional basis. The ultimate goal of this report is to provide clear and objective information on how well banks are serving smaller businesses. The information can be useful for business owners to help determine which bank is the most appropriate in serving their banking and financial needs. As well, it serves as an independent source of competitive market intelligence for the banks to improve the way they serve their SME clients. Those banks that choose to embrace the findings stand only to gain a competitive edge, earn more customers, and be more profitable.

2 Battle of the Banks 2 Assessing the Banks In assessing the banks, this report features scores by size of business and for overall performance. All scores are based on the survey responses from their SME clients. Bank scores take into account four important areas of the banking experience for SMEs, namely, financing, fees, account manager, and service. Each of these four areas received equal weight (25 per cent) in calculating the overall score for each bank. Bank scores reported are based on a relative scale of 0 (worst) to 10 (best). Refer to the Methodology section in the Appendix for more details on how scores were calculated. 1. Financing (3 factors): Willingness to lend Lending terms (interest, collateral, etc.) Information requirements for financing SME owners rely on financing from their main bank for their day-to-day purchases and longer term borrowing needs. Business owners also look to secure financing on competitive borrowing terms. 2. Fees (1 factor): Level of fees ME owners want low fees and expect the level of fees charged to reflect the quality and level of service received. 3. Account Manager (3 factors): Understanding of my business by account manager Accessibility of account manager Treatment by account manager The account manager experience can make or break the SME relationship. As the account manager acts as the key contact of the main bank, SME owners need the account manager to have a good understanding of their business, be accessible, and treat them well. 4. Service (4 factors): Clarity of bank statements Access to branch (e.g. proximity to local branch, hours of operation) User friendliness of online banking Range of services offered through online banking Banks also need to be aware of, and responsive to, other services that SME owners require. For example, bank statements should be made clear to help business owners with their recordkeeping, and to provide greater transparency in fees to better understand the rationale behind the fees. As well, business owners benefit from being able to access a branch near their business location and from having the option to conduct their banking online.

3 Battle of the Banks 3 Overall Rankings and Scores, All SMEs Overall scores are calculated based on scores received under each size of business (see next section) and are weighted according to the survey sample (41 per cent micro fewer than 5 employees, 54 per cent small 5 to 49 employees, 5 per cent mid 50 to 499 employees). Overall Rankings In 2012, credit unions dominated among all the banks in serving the SME market, similar to findings in 2009 (see Table 1). The Bank of Montreal and Scotiabank 1 tied for second place, up from their rankings in ATB Financial experienced a big drop from 2009 and landed in last place in The largest drop was attributed to HSBC, moving from second place in 2009 to ninth place in CIBC remained the worst big bank for 2012 when compared to Table 1: Overall Rankings, All SMEs, 2009 versus Credit union Credit union 2 HSBC Bank of Montreal/ Scotiabank (tie) 3 ATB Financial - 4 Scotiabank Caisses populaires 5 Bank of Montreal Royal Bank 6 Royal Bank TD Canada Trust 7 Caisses populaires National Bank 8 National Bank CIBC 9 TD Canada Trust HSBC 10 CIBC ATB Financial 1 Some business owners may be participating in exclusive discounts offered by Scotiabank through the CFIB Scotiabank Privilege Program. 2 The last report focused on scores for micro, small, and mid-sized businesses and therefore did not include overall scores for all SMEs.

4 Battle of the Banks 4 Overall Scores Overall (see Table 2), credit unions achieved the highest score (7.4) with the greatest strengths in three areas: financing (6.0), fees (7.5), and account manager (7.2). ATB Financial was awarded the lowest score (2.7), with the weakest performance for service (2.3). CIBC was the poorest in providing financing (1.9) while Royal Bank was worst in fees (1.0). HSBC was the worst in terms of providing a good account manager experience (2.0). TD Canada Trust scored the highest for service (9.0). Table 2: 2012 Overall Bank Scores by Area: All SMEs Best (10) Worst (0) Credit union Overall 7.4 Financing 6.0 Fees 7.5 Account Manager 7.2 Service 8.8 Bank of Montreal Scotiabank Caisses populaires Royal Bank TD Canada Trust National Bank CIBC HSBC ATB Financial I find the credit union is an excellent choice for small businesses. The monthly fees are a fraction of what commercial banks charge. Service is top notch. Credit union client, Automotive repair and maintenance operator, Yarmouth, Nova Scotia Bank Scores, by Size of Business Distinguishing business clients by their size is critical to obtaining an accurate assessment of banks since smaller businesses generally receive different levels of treatment and service compared to larger firms. Previous CFIB banking reports show that smaller businesses typically experience lower levels of satisfaction with their main bank. 3 To assess how banks are serving their business clients, three separate sets of scores are provided based on business size: micro (fewer than 5 employees); small (5 to 49 employees); and mid (50 to 499 employees). Micro Businesses (Fewer than 5 employees) Among micro businesses, credit unions outperformed all other banks with an overall score of 7.2 (see Figure 1, Table 3, and Appendix Table B2). Credit unions scored the highest in all four areas examined with particular strengths in service (clarity of bank statements, access to branch, and 3 Bruce, Doug and Queenie Wong. Banking on Better Service. Toronto: CFIB Research. (April 2010).

5 Battle of the Banks 5 online banking). Although strong in performance, it is also important to keep in mind their relative presence across the country. Credit unions are prominent in Western and Atlantic Canada but not so much in the rest of the country (see Appendix Table C2). Credit unions and TD Canada Trust both received the highest score (9.1) for service. Figure 1: Bank Scores for Micro Businesses (Fewer than 5 employees), (0 is worst, 10 is best) Credit union 7.2 Scotiabank 4.9 Bank of Montreal TD Canada Trust Royal Bank Caisses populaires National Bank CIBC ATB Financial HSBC Table 3: Bank Scores by Area: Micro Businesses (Fewer than 5 employees) Best (10) Worst (0) Credit union Overall 7.2 Financing 5.6 Fees 7.1 Account Manager 7.2 Service 9.1 Scotiabank Bank of Montreal TD Canada Trust Royal Bank Caisses populaires National Bank CIBC ATB Financial HSBC Overall, Scotiabank came in a distant second scoring 4.9, followed by Bank of Montreal at 4.0. These scores along with the scores of the remaining banks were less than 5.0, an indication that there is much room to improve to serve the smallest businesses. Among the big banks, CIBC received the lowest overall score (2.8). This low score is partially due to the finding that they received the lowest score (0.0) for financing among micro businesses. HSBC was the worst performing bank for micro businesses with an overall score of 2.1. In fact, this was the lowest score out of all size categories indicating that larger businesses tend to enjoy better service. HSBC was especially weak in providing sound financing options to micro businesses and ensuring that the account manager experience was a positive one. Micro businesses were the least satisfied with their HSBC account manager out of all banks (0.0).

6 Battle of the Banks 6 In terms of level of fees, Royal Bank was rated the worst (0.0) by micro businesses. ATB Financial was viewed as the poorest provider of services for micro businesses (1.3) due to lack of accessibility to branches and negative experiences with online banking features. We have dealt with CIBC for over 30 years and will be changing banks. Getting operating funds has been very difficult and has hampered our ability to grow. We have been dealing with a credit union for financing a new warehouse and will transfer all of our business to them. They want it and CIBC does not. Our account managers have been great but CIBC doesn't really want small businesses. CIBC client, Distributor, Sooke, British Columbia HSBC used to have long-term account representatives. No more. Satisfaction has gone from high to low in 5 years. HSBC client, Management consulting business owner, Kitchener, Ontario Very disappointed with RBC Fees are ridiculous and monthly fees are way too high. All the little extra fees for overuse are sneaky... RBC client, Retailer, Langley, British Columbia Small Businesses (5 to 49 employees) Scores for small businesses were comparatively higher than those for micro businesses. This demonstrates that business owners typically show higher levels of satisfaction with their bank, the larger their business. Credit unions outperformed other banks in all areas except service (i.e. access to branch and online banking) with an overall score of 7.4 (see Figure 2 and Table 4). The Bank of Montreal received the second highest overall score at 5.6, followed by caisses populaires at 5.5. Caisses populaires earned the highest score (9.2) for service such as access to branches and online banking. While limited to the Alberta market, ATB Financial received the lowest overall score (3.2). CIBC, National Bank and HSBC received relatively low overall scores in the 4.4 to 4.5 range. ATB Financial also scored low for service according to the results for micro businesses. This serves as a reminder that it may need to make serious efforts to with website capabilities and physical presence in Alberta.

7 Battle of the Banks 7 Figure 2: Bank Scores for Small Businesses (5 to 49 employees), (0 is worst, 10 is best) Credit union 7.4 Bank of Montreal Caisses populaires Royal Bank TD Canada Trust Scotiabank CIBC National Bank HSBC ATB Financial 3.2 Table 4: Bank Scores by Area: Small Businesses (5 to 49 employees) Best (10) Worst (0) Credit union Overall 7.4 Financing 6.0 Fees 7.5 Account Manager 7.3 Service 8.7 Bank of Montreal Caisses populaires Royal Bank TD Canada Trust Scotiabank CIBC National Bank HSBC ATB Financial TD Canada Trust was considered the worst performing bank in meeting the financing needs of small businesses (2.5). Similar to results for micro businesses, clients of Royal Bank experienced the worst levels of satisfaction with fees (1.5). In addition to RBC clients, many other bank clients commented on their dissatisfaction with the level of bank fees. This signals that no bank should be charging high fees without ensuring their clients receive good value in return for fees paid. As with HSBC clients in the micro size category, owners of small businesses were the least satisfied with HSBC s account managers (3.0) relative to clients of other banks. HSBC should take note of these results as client dissatisfaction with the account manager can lead to switching of banks. A major issue with the account manager experience is the frequent turnover of the account manager which puts the client relationship at risk. New incoming account managers are unfamiliar with the client and do not fully understand their business. Moreover, survey comments from business owners raised concerns about HSBC having shifted to centralized branch managers that are located in a different city and having reduced the number of local branch managers to deal with small business clients in person.

8 Battle of the Banks 8 We are using more online services and fees are higher than before. Other than start up costs for online services, fees should decrease. We are being gouged. - RBC client, Manufacturer, Saint-Laurent, Quebec It has been made abundantly clear that the banks means of generating revenue is very much fee driven. There doesn't appear to be any relief in sight with respect to the banks having a field day in charging their customers with what I would call "Made Up" fees... - TD Canada Trust client, Supplier, Fredericton, New Brunswick Service fees are much too high and based on every single transaction. There is no way to control it when you have to bank every day. - CIBC client, Machinery, equipment and supplies dealer, Dorval, Quebec I have had 22 account managers in 19 years of doing business with HSBC - unfortunately they feel that business under 5 million a year is not worthy of their services - it has been a constant struggle to create a relationship... - HSBC client, Supplier, Vancouver, British Columbia Mid-sized Businesses (50 to 499 employees) Once again, credit unions provided the best service to mid-sized businesses compared to other banks (8.5) (see Figure 3 and Table 5). Credit unions scored the highest in financing (9.7) and fees (10.0). Scores for mid-sized businesses were generally higher than those observed among the micro and small businesses. This is another indication that larger businesses typically experience higher levels of satisfaction with their banks. The Bank of Montreal was the best scoring major bank for midsized businesses with a score of 7.5. CIBC received the poorest scores overall (5.4), for the account manager experience (5.7), and service (4.5). National Bank received the lowest score (5.8) for financing among mid-sized businesses. Caisses populaires and HSBC tied (3.2) for the worst performing bank in terms of level of fees. Scotiabank received the highest score (9.3) for the account manager experience while caisses populaires received the highest score (9.1) for the service category. Dissatisfaction from clients of all sizes raises serious questions as to why CIBC fares so poorly in the treatment of SME clients. des (see Figure 4 and Appendix Table C1 and Table C2 CIBC must take concrete action to better understand SMEs and cater to their needs. Many of the banks are on the record numerous times stating they aim to boost their efforts in serving the SME market. The survey results show that there has been little progress and that there is much room for improvement.

9 Battle of the Banks 9 Figure 3: Bank Scores for Mid-sized Businesses (50 to 499 employees), (0 is worst, 10 is best) Credit union 8.5 Bank of Montreal Scotiabank Royal Bank National Bank Caisses populaires HSBC TD Canada Trust CIBC 5.4 Table 5: Bank Scores by Area: Mid-sized Businesses (50 to 499 employees) Best (10) Worst (0) Credit union Overall 8.5 Financing 9.7 Fees 10.0 Account Manager 6.7 Service 7.5 Bank of Montreal Scotiabank Royal Bank National Bank Caisses populaires HSBC TD Canada Trust CIBC The Big Five Banks: Best and Worst Since the five largest banks in Canada serve a large portion of the SME market (72.7 per cent), it is important to have a clearer understanding on how they performed relative to one another (see Table 6 and Figure 4) 4. Overall, the Bank of Montreal and Scotiabank are tied as the best scoring of the big five banks, with better performance in fees and account manager. CIBC is the worst scoring big bank, with weaker client satisfaction in financing, account manager, and service. When the scores are broken out by the size of business (i.e. micro, small, mid), some banks perform better than others. For example, the best scoring big bank for micro businesses is Scotiabank due to relatively stronger client satisfaction in financing, fees, and account manager. CIBC is viewed as the poorest performing big account managers and service. Among small businesses, the Bank of Montreal is the highest ranking big bank with strengths in fees and account manager. As with micro businesses, CIBC is the 4 In 2012, the largest market share was held by Royal Bank (18.7 per cent) followed by Scotiabank (17.9 per cent) and TD Canada Trust (16.0 per cent). From 2009 to 2012, the largest gain in market share was by Scotiabank (up 1.7 percentage points).

10 Battle of the Banks 10 worst major bank overall for small businesses, with particular setbacks in the account manager experience. For mid-sized businesses, the Bank of Montreal is the highest scoring big bank with strong competencies in financing and fees. CIBC is once again at the bottom of the pack with poor performance in financing, account manager, and service. Table 6: Best and Worst Big Bank by Area, by Size of Business Overall Best (Worst) Financing Best (Worst) Fees Best (Worst) Account Manager Best (Worst) Service Best (Worst) Micro Scotia (CIBC) Scotia (CIBC) Scotia/BMO (RBC) Scotia (CIBC) TD-CT (CIBC) Small BMO (CIBC) RBC (TD-CT) BMO (RBC) BMO (CIBC) TD-CT (Scotia) Mid BMO (CIBC) BMO (CIBC/TD-CT) BMO (TD-CT) Scotia (CIBC) RBC (CIBC) All SMEs BMO/Scotia (CIBC) RBC (CIBC) BMO (RBC) Scotia (CIBC) TD-CT (CIBC) Figure 4: SME Market Share of Big Banks (% businesses) RBC, Scotia, 17.9 TD-CT, BMO, 10.1 CIBC, BMO CIBC RBC Scotia TD-CT There is no reason why the level of service offered should differ by size of business. Micro businesses should expect the same level of service as that being provided to larger businesses. Any discrepancies in the quality of service offered as seen through the bank scores in this report should be taken seriously. Any areas with higher levels of client dissatisfaction point to serious deficiencies and need to be resolved by banks to ensure SMEs are properly served and supported. It

11 Battle of the Banks 11 is also important to keep in mind that even if a bank receives a high relative score, the bank can still make improvements in the way that they serve their SME clients. Building on the bank score results, the next section will provide an in-depth look at the financing needs of SMEs and assess whether these needs have been met by banks. SME Financing Trends in Typical Financing Sources for SMEs Access to competitively-priced financing is vital to the development of any business, whether it be short-term financing for cash flow needs or longer-term financing in the start-up or expansion stages. The most common source of financing used among business owners is their personal funds, equity and other assets, at 62 per cent (see Figure 5). It is more common for micro business owners to use their own funds for financing as opposed to small or mid-sized businesses. Younger business owners also tend to use their own funds compared to more mature business owners (e.g. in business for at least 10 ten years) who typically seek financing at their main bank. Bank financing such as business loans and credit lines through a bank are the second most commonly used financing source (60 per cent). Financing through a bank is also more common among larger businesses since they are more likely to meet the financing requirements. Personal financing through a bank is used by one third of owners. As with personal equity, a greater percentage of micro business owners rely on personal financing options (e.g. personal loans or lines of credit through a bank or through family and friends) compared to larger businesses. Figure 5: Which of the following sources has your business relied on for financing? (% response) My own equity/funds/assets Business loan/line of credit from bank/financial institution Credit card 44 Personal loan/line of credit from bank/financial institution 33 Personal loan/equity from friends/family Leasing Commercial mortgage Business Development Bank of Canada 9 Individual unrelated to my business/family (e.g. angel investor) Other 3 6 None of the above, my business has not required financing 8 For short-term financing needs such as day-to-day purchases, credit cards are commonly used by business owners (44 per cent). Smaller and younger businesses tend to rely more on credit card financing as opposed to larger businesses (i.e. mid-sized businesses and businesses in operation 5 Financing trends are based on the CFIB business financing survey conducted from September to November 2012.

12 Battle of the Banks 12 for at least ten years). Business owners need to be careful in managing this type of financing to avoid the associated high interest rate costs. Leasing and commercial mortgages are used by one in five business owners, while nine per cent resorted to Business Development Bank financing. Six per cent of business owners resort to financing aid from individuals unrelated to them such as angel investors, venture capitalists, or the previous business owner. Demand for Financing in Overall, slightly more than one third of business owners applied for financing at their main bank during the previous 12 months (see Figure 6). This includes applications for a term loan, new line of credit, or an increase in an existing credit line. Variations in the demand for financing exist across business sizes. For example, only 31 per cent of micro businesses applied for bank financing. Small and mid-sized business owners were more likely to apply for financing, at 36 per cent and 50 per cent respectively. Figure 6: Demand for Bank Financing: Share of SMEs that applied for financing in past 12 months (% response) By Size of Business: Micro (Fewer than 5 employees) Small (5-49 employees) Mid ( employees) Total By Bank: National Bank 44 Caisses populaires HSBC ATB Financial Royal Bank Credit union Bank of Montreal Scotiabank TD Canada Trust CIBC 28

13 Battle of the Banks 13 Reasons for Applying for Financing in Almost half of SME owners applied for financing to add to business cash flow (see Figure 7). Over a third of business owners borrowed funds to purchase physical capital such as vehicles or machinery while 22 per cent of owners used financing to purchase inventory. A significant number of business owners cited other uses of borrowed funds including renovation, refinancing, and business expansion. About one in ten business owners have used financing to expand into new markets or develop new products and services. Figure 7: Why did your business apply for a term loan or a line of credit? (% response) To add to business cashflow 46 To purchase physical capital (e.g. vehicles, machinery, etc.) 38 To purchase inventory 22 Other 14 To expand into new markets 12 To develop new products and services 12

14 Battle of the Banks 14 Assessment of Financing Application It appears that SME owners are not always provided with full information on how they were assessed in their application for financing including their credit score. Only one third of business owners felt that they were given full information on the assessment of their credit worthiness (see Figure 8). Business owners should be informed about both their business and personal 6 credit scores by their main bank since their financing applications may be denied if there is inaccurate or insufficient information. Currently, individuals have the right to access their personal credit report and should contact both Equifax Canada and TransUnion Canada (credit reporting agencies) to obtain this information. Business owners can obtain information on business credit reports through Equifax Canada, TransUnion, or Dun and Bradstreet. Figure 8: Did your business' main financial institution provide you with full information on how they assessed your credit worthiness for a loan, including your credit score? (% response) Don't know, 12 No, 55 Yes, 33 6 Canadian Bankers Association. Understanding Your Credit Report. Web. 1 March

15 Battle of the Banks 15 Reasons for Not Applying for Financing in Out of the business owners who did not apply for financing, almost three quarters expressed that they did not require additional funding at the time (see Figure 9). This finding is not too surprising given the recent recession and slow economic recovery. However, 13 per cent of business owners resorted to other sources of financing which could indicate that banks were not meeting the demand from SME owners. In addition, 12 per cent of business owners believed that their main bank would not approve their application for financing. This is discouraging since this may be an indication that these businesses are underfunded and not meeting their full potential. Figure 9: Why did your business not apply for financing at your business main financial institution (% response) My business did not require additional financing 73 My business resorted to other sources of financing 13 My business was in need of financing, but I believed that my financial institution would not approve application 12 My business cannot afford to borrow more funds 7 Other 4 SMEs Rejected for Financing The overall loan rejection rate for 2012 stood at 18.4 per cent (see Table 7). This is still relatively high compared to a decade ago when rejection rates were closer to ten per cent. Monitoring loan rejection rates is critical to understanding whether the banking sector is meeting the financing requirements of the SME sector. The rate varies according to several factors, such as business size and the experience of the owner. For example, smaller businesses and those that are less established in terms of business experience generally face higher risk of having their loan application turned down. Service businesses also have difficulty securing financing due to strict lending requirements such as collateral. Table 7: Loan Rejection Rates (% response)

16 Battle of the Banks 16 Saying no to business owners is a much more common occurrence at CIBC, TD Canada Trust and Scotiabank compared to other banks (see Figure 10). These three banks have rejection rates of around 25 per cent. Loan rejections are less frequent for the remaining players loan rejection rates fall in the narrow band of 14 per cent to 16 per cent. Still, business owners can face difficulty in applying and qualifying for financing requested. In many cases, approval processes are automated and limit decision making of the account manager. Lending requirements can also be demanding even when businesses have been in operation for a number of years. Caisses populaires and HSBC have the lowest rejection rates at 10.5 and 12.5 per cent respectively. Caisses populaires seem to be more aggressive than other banks in ensuring that financing is made available to businesses. Caisses populaires may be further acknowledging that catering to the needs of small businesses can generate good business in the long run. Caisses populaires seek to benefit from higher approval rates of financing. Historically, they are known to charge higher than average borrowing rates. HSBC, on the other hand, typically deals with larger businesses and lower loan rejection rates may reflect the fact that larger clients are more likely to meet the requirements for financing. Figure 10: Loan Rejection Rates (% response) By Size of Business Micro (Fewer than 5 employees) Small (5-49 employees) Mid ( employees) By Bank: TD Canada Trust Scotiabank CIBC Royal Bank Credit union Bank of Montreal National Bank ATB Financial HSBC 12.5 Caisses populaires 10.5

17 Battle of the Banks 17 The steps required for commercial financing are difficult and expensive We believe most business owners may have given up during this process. TD Canada Trust client, Home improvement contractor, Scarborough, Ontario The banks have no interest in financing small business unless they are 100% secured on company assets, personal insurance and guarantees. If we are going to borrow on those terms, I might as well be the secured lender myself. Bank of Montreal client, Distributor, Saint-Laurent, Quebec Banks have no interest in making loans to small businesses regardless of the purpose for the loan. The account managers have zero freedom to act - at least at RBC. Any application for a loan is put in a matrix and if one item falls outside the matrix, the loan is denied At the same time, RBC encouraged us to use our RBC Visa credit card and pay 20% interest on any unpaid balance. If this is RBC's way of helping small business, I guess there's some part of their marketing campaign I'm missing or don't understand yet RBC client, Retailer, Calgary, Alberta For business owners who were turned down for financing, only half were given the main reason(s) for the decision (see Figure 11). Over a quarter of business owners were given information on the requirements necessary to reconsider their application. One quarter of business owners were not given any information. Just 12 per cent of business owners were given information on alternative financing sources.

18 Battle of the Banks 18 Figure 11: At the time your application for financing was rejected, what type of information was provided to you by your business main financial institution? (% response) Main reason(s) for the decision 49 Requirements necessary to reconsider the application 27 No information was provided 25 Alternative financing sources 12 Other information than listed above 10 There is evidence that banks may not be treating their SME clients to the best of their ability. SME clients expect to be given advice when they require help with financing. In fact, according to the Small Business Banking Code of Conduct 7 (see Appendix D), banks are obligated to inform their customer on the main reason(s) for the decision on their financing application, requirements necessary for the bank to reconsider the application, and available information on alternative sources of financing. Access to financing can certainly be improved with better communication between banks and their SME clients. Both parties benefit from having full information to enhance the application process and to improve the odds of securing financing needs. Approved Financing Amounts This amount included either a new line of credit, an increase in an existing line of credit, or a term loan (see Table 8). The median financing amount was $60,000 for the smallest firms with fewer than five employees while financing for mid-sized businesses with 50 to 499 employees was around $1.2 million. Table 8: Median Amount of Financing Approved*, by Size of Business Business size (# employees) Micro (Fewer than 5 employees) $ $ $ 50,000 50,000 60,000 Small (5-49 employees) 150, , ,000 Mid ( employees) 950,000 1,000,000 1,200,000 Overall 100, , ,000 7 Canadian Bankers Association. Small Business Banking Code of Conduct. Web. 1 March

19 Battle of the Banks 19 Median loan amounts have increased from 2009 for all banks (see Table 9). The amount of the loan reflects the type of clients the bank is catering to. Larger loan amounts are usually associated with larger businesses and businesses in specialized industries (see Appendix Table B1) requiring a significant amount of financing (e.g. agriculture). Examples of higher than average loan amounts can also be seen for clients of ATB Financial and HSBC ($400,000 and $600,000 respectively). Table 9: Median Amount of Financing Approved*, by Banking Institution $ $ $ Royal Bank 100, , ,000 CIBC 100, , ,000 Bank of Montreal 200, , ,000 Scotiabank 80,000 70,000 90,000 TD Canada Trust 100, , ,500 National Bank 150, , ,000 HSBC 500, , ,000 Caisses populaires 75,000 75, ,000 Credit union 71,000 91, ,000 ATB Financial 155, , ,000 * Includes the term loan amount and/or credit line limit approved by a bank. Scotiabank, credit unions, caisses populaires, and TD Canada Trust clients typically have median loan amounts under $150,000, indicating that many are micro businesses. Royal Bank, CIBC, Bank of Montreal, and National Bank clients tend to have loan amounts around $250,000 which match closely to the median loan amount of most small businesses with 5 to 49 employees. Cost of Financing SMEs that obtained credit financing from their bank paid on average 1.87 percentage points above the prime rate (see Figure 12). The prime rate charged by the major chartered banks during the survey period was three per cent. 8 The cost of loans is similar to that found in 2009, but up significantly from previous CFIB surveys in 2000 and 2003 that indicated the average financing costs were 1.53 and 1.58 points above prime, respectively. This is not surprising given the overall tightening of credit due to the economic downturn. 8 Bank of Canada. Canadian interest rates and monetary policy variables: 10-year lookup. Web. 18 January

20 Battle of the Banks 20 Figure 12: Interest Rate over Prime, by Bank (percentage points above the prime rate) Caisses populaires TD Canada Trust Royal Bank Scotiabank National Bank Bank of Montreal Credit union ATB Financial HSBC CIBC Total Among all banks, the lowest average financing rate offered was at CIBC at 1.27 above prime (see Figure 12). HSBC and ATB Financial also offered lower interest rates than most banks, at 1.50 and 1.59 points above prime. SME clients at caisses populaires were charged the highest rates above prime, at 2.56 percentage points above prime. This may be due to the fact that caisses populaires are the only option for banking in certain regions and are subject to less competition on interest rates. TD Canada Trust, Royal Bank, and Scotiabank averaged 2.01, 1.96, and 1.95 above prime rate, respectively. While aggressive pricing can be a strategy used by banks to win over clients, it does not guarantee success as other aspects of the banking experience matter just as greatly, especially when it comes to customer service and understanding the business. We have dealt with our financial institution for 12 years and our rating is extremely high. They ask for the world and charge high interest rates. We have had much better offers from other institutions and will be transferring to another bank - TD Canada Trust client, Heating and air conditioning services provider, Edmonton, Alberta

21 Battle of the Banks 21 The smaller the business, the higher is the cost of bank financing. On average, businesses with fewer than five employees were charged 2.29 points above prime (see Figure 13). The average rate over prime for small and mid-sized businesses was significantly lower at 1.77 per cent for businesses with 5 to 49 employees and 1.30 per cent for those with 50 to 499 employees. Figure 13: Interest Rate over Prime, by Size of Firm (percentage points above the Prime rate) Micro (Fewer than 5 employees) Small (5-49 employees) Mid ( employees) Total

22 Battle of the Banks 22 Conclusions and Recommendations Overall, credit unions dominate in serving the smallest businesses. This is true for SMEs of all sizes micro, small and mid-sized. Among the big five banks, the Bank of Montreal and Scotiabank received the highest overall scores from their business clients, while CIBC fared the worst in meeting the needs of their SME clients. Taking into account all banks, the highest and lowest overall scores across all SMEs are listed below for the four assessment areas (financing, fees, account manager, and service): Best and Worst Scores by Area (0 is worst, 10 is best) Overall: Best (7.4, Credit union) Worst (2.7, ATB Financial) Financing: Best (6.0, Credit union) Worst (1.9, CIBC) Fees: Best (7.5, Credit union) Worst (1.0, RBC) Account manager: Best (7.2, Credit union) Worst (2.0, HSBC) Service: Best (9.0, TD Canada Trust) Worst (2.3, ATB Financial) To lead Canada on a path hindered in its ability to focus on jobs and growth. Access to affordable financing and banking services is therefore essential if SMEs are to play their part in growing the economy and creating more jobs. To help achieve this goal, CFIB offers the following recommendations directed at SME owners, the banking sector, and policymakers:

23 Battle of the Banks 23 SME Owners Use the information in this report to help determine which bank is the most appropriate for your financing or banking needs. Shop around for competitive rates and services. Keep your bank account manager informed about your developments, plans, needs, and concerns. A more informed banker is better able to serve you. Request regular meetings with your bank account manager to review your business banking needs. Ask your bank for alternative sources of financing if declined for bank financing. Banks, credit unions & caisses populaires Financing Concentrate on providing low cost financing and increasing access for SMEs in need of financing. Do not promote credit cards as a main alternative source of long-term financing for SMEs. Offer more flexibility in lending and provide more information on banking solutions to your SME clients. Adhere to Small Business Banking Code of Conduct with regards to financing. Major banks such as as CIBC and HSBC need to recommit to the SME market. Fees Use the findings in this report to better serve your SME clients. Focus on core business banking and the competencies required to improve the delivery of banking services to your SME clients. Reduce fees and ensure value for services offered to SME clients. Ensure that existing and new types of payment are not designed to benefit only banks and electronic solutions providers (i.e. SMEs should not be treated as a cash cow). Ensure transparency of costs associated with the processing of all types of payment. Provide incentives to use newer and more efficient types of payment (e.g. online payments, Business to Business/B2B, etc.). Account Manager Empower account managers at the branch level by ensuring that they are well versed on small business needs and risk assessment as well as by giving them greater decision-making and credit-scoring authority. Decrease account manager turnover rate. The business client-bank relationship can be improved by decreasing the number of times the account manager is changed. Instead, focus

24 Battle of the Banks 24 on building a long-term relationship with the SME client by conducting regular visits and meetings. Explain clearly to the client what credit scoring is, its importance, and strategies on how to improve the score. Assess the risk of SME clients through a combination of credit scoring and the knowledge gained through the account manager s relationship with their SME clients. Service Build stronger community presence among SMEs. Do not abandon SMEs in non-urban areas. Develop low-cost options for electronic payments (e.g. online, mobile, etc.). Develop low-cost options for Business to Business (B2B) payments. Government Ensure banks actively promote alternative sources of financing as per Small Business Banking Code of Conduct. Be creative in promoting awareness and increasing access to alternative sources of financing besides bank financing (e.g. angel investing, crowdfunding, venture capital). Ensure that banks adhere to the Small Business Banking Code of Conduct and that the interests of SMEs is served. This report is based on the results of a survey conducted over the period from September to November 2012 in which a total of 12,877 responses were received. The responses reflect the views of SMEs located in all regions and sectors throughout Canada. The responses are accurate within plus/minus 0.9 percentage points, 19 times out of 20. The margin of error is larger within regions and sectors. For further details on recent CFIB research publications on banking issues, please refer to the following: Bruce, Doug and Queenie Wong. Banking on Better Service. Toronto: CFIB Research. (April 2010). Bruce, Doug. Banking Matters. Toronto: CFIB Research. (November 2007). Bruce, Doug. Banking on Competition. Toronto: CFIB Research. (October 2003). Bruce, Doug. Banking on Entrepreneurship. Toronto: CFIB Research. (March 2001).

25 Battle of the Banks 25 Appendices: A. Bank Scores: Methodology Through a survey, CFIB members were asked to rate their main bank (very satisfied, somewhat satisfied, somewhat dissatisfied, very dissatisfied) on eleven factors. Across each factor, an index was created to score and rate each bank on a scale of zero (worst) to 10 (best). The highest assigned score of 0 while the lowest percentage of respondents in this case received a score of 10. All other values were standardized and lie between 0 and 10. These values form a relative index as a basis for comparison. Scores presented are relative by size of firm (fewer than 5 employees, 5-49 employees, employees). ATB Financial is excluded in the employee size category due to small survey sample sizes. The main rationale for distinguishing business clients by their size is based on the premise that smaller businesses generally receive different levels of treatment and service from their bank compared to larger firms. This has been documented extensively in previous CFIB studies. Another reason to focus on the size of the business is that certain institutions cater to different business clients. For example, HSBC business clients are likely to be mid-sized and more established in terms of business experience, while credit union clients are smaller in size and locally-based. The bank scores are important information for business owners to use in making informed decisions. Choosing a bank that is the right fit for the business can make the difference between success and failure. Conversely, the scores provide banks with a valuable source of intelligence on how they are treating their business clients. The formula used for the standardized score for each factor is: (max-x)/(max-min)*10 Where x = the value of % Very Dissatisfied and % Somewhat Dissatisfied for each bank Min and max are the minimum and maximum of the values (sum of % Very Dissatisfied and % Somewhat Dissatisfied) across each factor. An average of the standardized scores was calculated for each of the four areas across each bank: 1. Financing (3 factors): Willingness to lend Lending terms (interest, collateral, etc.) Information requirements for financing 2. Fees (1 factor): Level of fees

26 Battle of the Banks Account Manager (3 factors): Understanding of my business by account manager Accessibility of account manager Treatment by account manager 4. Service (4 factors): Clarity of bank statements Access to branch (e.g. proximity to local branch, hours of operation) User friendliness of online banking Range of services offered through online banking The four areas (financing, fees, account manager, and service) were then used to calculate scores for each bank using equal weights based on the relative level of importance for SMEs for financing, fees, account manager, and service: 25 per cent Financing 25 per cent Fees 25 per cent Account Manager 25 per cent Service Overall scores are then calculated using bank scores received under each size of business and are weighted according to the survey sample (41per cent micro - fewer than 5 employees, 54 per cent small - 5 to 49 employees, 5 per cent mid - 50 to 499 employees).

27 Battle of the Banks 27 B. Additional Data Table B1: Selected SME Debt Financing Indicators, by Industry Median Loan Amount Approved ($) Interest Rate Over Prime (%) Loan Rejection Rate (%) Firms with 3 or More Account Managers (%) Agriculture 300, Natural Resources 350, Construction 150, Manufacturing 300, Wholesale 400, Retail 100, Transportation 200, Arts, Recreation, and 100, Information Finance, Insurance 200, Professional Services 90, Enterprises and Admin. 100, Social Services 90, Hospitality 155, Personal, Misc. Services 75, All industries 161,

28 Battle of the Banks 28 Table B2 Bank Scores: by Size of Business a. Micro Best (10) Overall Financing Fees Account Manager Service Worst (0) Credit union Scotiabank Bank of Montreal TD Canada Trust Royal Bank Caisses populaires National Bank CIBC ATB Financial HSBC b. Small Best (10) Worst (0) Credit union Bank of Montreal Caisses populaires Royal Bank TD Canada Trust Scotiabank CIBC National Bank HSBC ATB Financial c. Mid-sized Best (10) Worst (0) Credit union Bank of Montreal Scotiabank Royal Bank National Bank Caisses populaires HSBC TD Canada Trust CIBC

29 Battle of the Banks 29 C. SME Market Share of Major Banks When examining the past decade, significant declines occurred across select banks, namely CIBC (-3.4 percentage points), Royal Bank (-2.5 percentage points), and Bank of Montreal (-2.5 percentage points). The decrease in market shares for CIBC and Royal Bank were even more pronounced in the last two decades (decrease of 9.4 and 5.6 percentage points, respectively). This raises questions as to whether these two major institutions intentionally neglected the SME market entirely or whether they have simply failed to understand SME clients. Which financial institutions stood out from the rest? Since 2000, Scotiabank boosted its market share by 6.7 percentage points while TD Canada Trust increased its market share by 3.9 percentage points. Table C1: SME Market Share for Big Banks (%, based on clients) Absolute Change Royal Bank Scotiabank TD Canada Trust* Bank of Montreal CIBC * Data for 2000 does not reflect market share for Canada Trust given TD Bank acquired this trust company in 2001.

30 Battle of the Banks 30 Table C2: Banking Market Share Leaders for SMEs in 2012, (%, based on clients), by Region Atlantic Quebec Ontario Change Change Change Scotia Caisses pop TD-CT RBC National Scotia BMO RBC RBC CIBC BMO CIBC CU Scotia BMO TD-CT TD-CT CU Caisses pop CIBC HSBC Man. & Sask. Alberta* B.C Change Change Change CU ATB CU RBC RBC RBC Scotia TD-CT Scotia TD-CT Scotia TD-CT CIBC CU CIBC BMO BMO BMO Caisses pop CIBC HSBC *HSBC market share in Alberta is 3.8%. Certain banks have a regional focus in Canada. For example, ATB Financial is limited to the Alberta market given it is owned by the provincial government. Caisses populaires are predominantly focused in Quebec, but have ventured into other provinces such as Ontario, New Brunswick, and Manitoba. Most credit unions by their very mandate focus on local markets. The extent of the regional market concentration varies across the country. One in every two SMEs in Atlantic Canada either bank at Scotiabank or Royal Bank. Respective market shares are 30.7 per cent and 21.7 per cent. In Ontario, close to two thirds of the SME market is held by three banks TD Canada Trust (23.3 per cent), Scotiabank (21.5 per cent), and Royal Bank (20.9 per cent). Caisses populaires have a very strong foothold in the Quebec SME market, with a 44.4 per cent share. However, among the regional changes in market share, caisses populaires faced the largest drop in Quebec from 2009 to 2012 (decrease of 3.2 percentage points). Likewise, credit unions lost market share in Manitoba/Saskatchewan (-1.9 percentage points) and Alberta (-2.3 percentage points) in the last three years. Still, credit unions hold a substantial share of the market in these provinces. CIBC lost ground in market share in Quebec (-1.0 percentage points), Ontario (-0.5 percentage points), and Alberta (-1.2 percentage points) during the same period. The largest regional gains in market share were by Scotiabank (+2.8 percentage points in Quebec and +2.6 percentage points in Ontario) and TD Canada Trust (+2.7 percentage points in Alberta and +2.2 percentage points in British Columbia). Royal Bank picked up additional market shares in Atlantic Canada (+1.7 percentage points), Manitoba/Saskatchewan (+1.8 percentage points), and Quebec (+0.9 percentage points).