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					k p mg Consulting




        Small Business Banking
              in Australia

            A research report




                February 2002
k p mg Consulting                                    Small Business Banking in Australia
                                                                        February 2002




Contents

1        Executive Summary                                                            1

2        Introduction                                                                 4
2.1      The research framework                                                       4
2.2      Disclaimer                                                                   5

3        Background                                                                   6

4        Small business in Australia                                                  8
4.1      The definition of „small business‟                                           8
4.2      The Australian small business market                                         8
4.3      Bank lending to small business                                               9

5        Small business banking products                                            10
5.1      Money transmissions                                                        10
5.2      Cash collections                                                           10
5.3      External finance                                                           11
5.3.1    Debt finance                                                               11
5.3.2    Alternative debt products                                                  12
5.3.3    Equity finance                                                             13
5.3.4    International trade finance                                                14
5.4      Product innovation – international comparisons                             15
5.5      Summary                                                                    15

6        Providers of banking services                                              21
6.1      Providers of transaction accounts                                          21
6.1.1    The overall picture                                                        21
6.1.2    Credit Unions and Building Societies                                       21
6.1.3    Regional banks                                                             22
6.2      Debt financing providers                                                   22
6.2.1    Finance companies                                                          23
6.3      Other emerging service providers                                           25
6.3.1    GiroPost                                                                   25
6.3.2    Franchises, agencies and „in-store‟ facilities                             26
6.4      Equity finance providers                                                   26
6.4.1    Venture capitalists                                                        27
6.4.2    Business Angels                                                            27
6.4.3    Incubators                                                                 27
6.4.4    Banks as equity providers                                                  27
6.5      Market Share                                                               28
6.5.1    The overall picture                                                        28
6.5.2    The regional picture                                                       28
6.6      Market share distribution                                                  30


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k p mg Consulting                                  Small Business Banking in Australia
                                                                      February 2002




6.6.1    Full-service provision                                                   30
6.6.2    Bank location and convenience                                            30
6.6.3    The cost of switching                                                    31
6.6.4    Credit risk management                                                   31
6.6.5    The power of the brand                                                   31
6.7      Summary                                                                  32

7        Pricing                                                                  33
7.1      Transaction account pricing                                              33
7.1.1    The Australian position                                                  33
7.1.2    International pricing comparisons                                        36
7.2      The cost of debt finance                                                 38
7.2.1    Risk premiums for debt finance                                           39
7.2.2    Small business failure                                                   40
7.2.3    Small business bankruptcies                                              40
7.3      Changes in interest margins and bank fees                                41
7.3.1    Interest margin changes                                                  41
7.3.2    Movements in bank fees                                                   42
7.4      Summary                                                                  43

8        Small business banking behaviour                                         45
8.1.1    Institutional preferences                                                45
8.1.2    The propensity to switch                                                 45
8.1.3    Use of more than one provider                                            46
8.1.4    The increasing use of electronic channels to access current
         accounts                                                                 46
8.1.5    The use of equity capital                                                47
8.2      Summary                                                                  47

9        Agribusiness                                                             49
9.1      Farm Management Deposit Scheme (FMD)                                     49
9.2      AWB Ltd                                                                  50
9.3      Australian Rural-Agricultural Finance                                    51
9.4      Registered pastoral finance companies                                    51
9.5      Rural Finance Corporation of Victoria                                    52
9.6      Summary                                                                  53

10       Conclusions                                                              54

11       Bibliography                                                             56
11.1     For further details                                                      57

APPENDIX A: PROVIDERS OF BANKING PRODUCTS TO SMALL BUSINESS




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    k p mg Consulting                                         Small Business Banking in Australia
                                                                                 February 2002




1   Executive Summary
    The key determinants of effectiveness of small business banking in Australia
    which we adopted for this research were…
       -   Is there a reasonable number of suppliers of banking and financial services
           to small business in the Australian market?
       -   Are there new providers of banking and financial services entering the small
           business market?
       -   Are the prices charged to small businesses for banking and financial services
           reasonable and competitive?
       -   Given the importance of external finance (overdraft, loans, equity etc) to
           small business, is such finance available, and is the cost reasonable?
       -   Are the suppliers of banking and financial services to small businesses
           introducing new products which are keeping pace with developments in the
           sector and the economy generally?

    Our conclusions are…

    Small business is a significant component of the Australian economy…

       There are in excess of one million small businesses in Australia representing
       around 96% of all businesses and employing more than 3 million people. And
       banks have advanced $66 billion in credit to the small business sector.

    …which is enjoying an increasing range of banking and related services…

       Fifty-seven institutions now provide approximately 720 different debt finance
       products, and 44 institutions now provide 72 different business transaction
       accounts, all of which are aimed at small businesses. There are also a number
       of organisations offering specialist services to agribusiness.

    …so, the provision of such services to small businesses has moved
    significantly beyond the banking sector…

       Providers include credit unions, building societies, mortgage originators, finance
       companies etc. And, there are an increasing number of niche providers and
       other arrangements for supporting small businesses.

    …but, despite the increasing range of products, service providers, and
    channels, small businesses still choose to retain their banking business with
    a bank…

       A Yellow Pages Survey in 1999 found that depending on the State, the „big four‟
       banks enjoy a market share of small business banking of between 63% and
       90%.

    …and small businesses are remarkably loyal, with only around 16% changing
    their banking provider over a two-year period…

       Small businesses generally prefer the conveniently located „local‟ facilities
       offered by the banks which, notwithstanding branch closures, have around 5000

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k p mg Consulting                                         Small Business Banking in Australia
                                                                             February 2002



   branches nationally. In contrast, the four largest credit unions between them
   have around 120 branches, agencies or service outlets.

…with this in mind, a number of organisations are working with banks and
financial institutions to extend the number and spread of ‘local’ facilities…

   GiroPost with Australia Post is a good example, where 76 financial institutions
   are providing services, initially to personal customers, but increasingly being
   piloted for small business.

The market share of regional banks and other financial service providers such
as credit unions, building societies and mortgage originators is increasing…

   Around 40% of the small businesses switching financial institutions choose a
   non-bank provider. In fact, in the past five years, regional banks have doubled
   their share of deposits to an estimated 12% and seen a 20% increase in their
   share of debt to 11%.

…and, it tends to be the larger and faster growing small businesses which
change their financial institution, with the main reasons for change being
better service (47%) and lower fees (32%)…

…factors such as the longer history of banks with small business and hence
their better ability to manage credit risk for the high risk small business
sector; the perception of the bank brands; and the costs of switching, also
influence switching behaviour…

…and, in common with other banking users, small businesses are
increasingly moving to electronic channels…

   The number of small businesses accessing the Internet has more than doubled
   since 1998, and up to 80% of them use it for some form of banking.

Prices for transaction accounts vary widely across providers and between
channels, but there does not seem to be any evidence of shopping around for
the best deal…

   Market share of small business does not seem to be related to prices available.

Australia is generally a low-cost environment for small business banking
services internationally…

   Australia has significantly lower costs than five other major economies for cash
   withdrawals and credits, while it is below the mean of the others in the areas of
   automated payments, automated collections, cheque payments and cheque
   collections. The only area where Australia‟s charges were higher than the mean
   is in standing orders.

…and, over recent times small businesses have benefited from a reduction in
a number of prices…

   These include reduced interest rate margins, lower establishment fees on term
   loans and overdrafts, and lower service fees on overdrafts.


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k p mg Consulting                                         Small Business Banking in Australia
                                                                             February 2002



…while these have significantly outweighed fee increases on deposits and
service fee increases on term loans…

   For example, assuming that the reductions in net interest margins between 1995
   and 2000 are reflected entirely in the costs of loans, the reduced cost to small
   business of a $100,000 loan would be $2,140 per annum. If the comparison
   were with 1997 to 2000, the savings would be $1,400. This could be combined
   with savings on fees on a $100,000 overdraft over the same period to produce a
   reduced cost of $1,620.

In the aggregate, for business, the decline in fees charged by banks on loans
offsets the increase in fees charged on deposits by $36 million from 1998 to
2000…

   But, these benefits may not have been felt by all small businesses. The impacts
   on individual businesses depend on a number of variables including the type and
   number of transactions, and whether they have loans as well as deposits;

There does not appear to be a difficulty for small business to access debt
finance in Australia…

   In the year to September 2001, the banks advanced $25 billion in credit to
   business – around 38% of the total credit outstanding of $66 billion.

On a global assessment, Australia has been rated as being moderately
innovative in the area of small business banking…

   It is assessed as comparable with the UK and Canada, behind the US, but
   ahead of France and Germany.




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      k p mg Consulting                                                  Small Business Banking in Australia
                                                                                            February 2002




2     Introduction
      The small business sector in Australia has been through a period of difficult and
      demanding change with the introduction of the GST and some slowing of the
      economy.

      Economic conditions are forecast to pick up over the coming months, and small
      businesses are expected to be key drivers of continued growth in the economy.

      For their success, small businesses rely to a significant extent on support from their
      financial institutions. An effective and efficient banking and financial services sector
      is essential to underpin the level of economic growth in this sector of the Australian
      economy.

      The Australian Bankers Association (ABA) commissioned KPMG Consulting (KCIN)
      and its global research arm, the Nolan Norton Institute (NNI), to carry out a short
      preliminary research project into the features of small business banking in Australia.

      The aim of the project is to review publicly available information on the small
      business banking market, and to draw some preliminary conclusions about the
      sector.

      This will help policy makers, business, and the community to make informed
      assessments about the provision of products and services for this important sector
      of the economy.

      We have found that there is a shortage of comprehensive, detailed data and
      objective analysis about the small business banking market in Australia.

      This document brings together information currently available from a range of
      sources on small business financial services.


2.1   The research framework
      To assess the effectiveness of the small business banking and financial services
      sector in Australia, we have determined a range of factors to be investigated in this
      research project.

      In arriving at these factors, we have considered a number of sources. Key among
      these was the Cruickshank Report1 - a review of the banking sector in the United
      Kingdom.

      The key determinants of effective banking and financial services to small business
      are –
           Is there a reasonable number of suppliers of banking and financial services to
            small business in the Australian market?



      1
          Cruickshank, D., 2000, Competition in UK Banking. A Report to the Chancellor of the Exchequer.



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      k p mg Consulting                                         Small Business Banking in Australia
                                                                                   February 2002



         Are there new providers of banking and financial services entering the small
          business market?
         Are the prices charged to small businesses for banking and financial services
          reasonable and competitive?
         Given the importance of external finance (overdraft, loans, equity etc) to small
          business, is such finance available, and is the cost reasonable?
         Are the suppliers of banking and financial services to small businesses
          introducing new products which are keeping pace with developments in the
          sector and the economy generally?

      In our research, we have sought to investigate these factors and to draw some
      conclusions about the state of the small business banking sector in Australia.

      As a result of our research we have also identified where further research would be
      beneficial in getting a greater understanding of the sector.


2.2   Disclaimer
      This report has been produced solely from already published, publicly available
      data. It does not include original research by KPMG Consulting.

      The statements and opinions in this report are given in good faith but rely upon
      information from the sources identified in the report; comments from the Australian
      Bankers Association; and also draw upon the resources of KPMG Consulting.

      KPMG Consulting does not have any pecuniary interest that could reasonably be
      regarded as being capable of affecting its ability to give an unbiased opinion in
      relation to the matters researched in this report.

      KPMG Consulting will receive a professional fee for the preparation of this report.




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    k p mg Consulting                                                   Small Business Banking in Australia
                                                                                           February 2002




3   Background
    The following is a brief history of the financial system in Australia. All information in
    this section was sourced from the Reserve Bank of Australia (RBA)2.

    Like other industrial countries, Australia has experienced major changes to its
    financial system in recent decades. The net effect has been a transformation in the
    Australian financial system from a relatively closed, oligopolistic structure in the
    1950‟s and 1960‟s, based predominantly on traditional bank intermediation, to a
    more open and competitive system offering a much wider variety of services from an
    array of different providers.

    This process of financial system evolution, while driven largely by market forces, has
    been assisted by prevailing regulatory and supervisory arrangements.

    Among the range of influences on financial-sector development, three main forces
    can be highlighted:
       Financial regulatory policy – which, to an important degree, shaped the broad
        trends in banks‟ market shares in recent decades;
       Technological developments – have been important in reducing the cost of many
        information-intensive financial activities, and in making available a wide range of
        new products and delivery systems;
       Cross-subsidisation of payments services – the persistence of elements of this
        pricing structure has created opportunities for growth of specialist low-cost
        financial service providers, which have become an increasingly important source
        of competitive pressure on banks.
    Specialist providers such as mortgage managers and brokers took advantage of the
    fact that technological improvement was continually reducing the information costs
    associated with direct financing, and started to erode the banks traditional
    comparative advantage in credit assessment.
    A much more important spur to competition for specialist lines of business came
    with the growth, in size and liquidity, of securities markets in the late 1970s and
    early 1980s. This allowed specialist institutions either to finance their lending
    activities by raising funds in liquid securities markets, or to operate effectively as
    retail deposit-takers while investing their funds in securities rather than loans.
    In other words, the development of securities markets helped to make possible the
    provision of deposit and lending services by separate institutions, rather than the
    „full-service‟ provision of deposit-taking, lending, and transaction services by one
    organisation.
    Examples of the growth in specialist lines of business include:
       Unit trusts;
       Merchant banking; and
       Mortgage managers (these specialists entered the market for lending to small
        business with mixed success and so far remain a small part of the market).

    2
     RBA: Small Business Lending, 1997;
    RBA: Evolving Structure of the Australian Financial System, 1996;
    RBA: The Australian Financial System in the 1990’s

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k p mg Consulting                                         Small Business Banking in Australia
                                                                             February 2002



The banks‟ response to increased competition from specialist providers was to
compete „at the margin‟ by introducing new products rather than cutting the price of
existing products.

The new products for small businesses are generally secured against residential
property, and a number of banks have also made available loans to small business
against their expected cash flow or using other assets as collateral (e.g. plant and
equipment, inventories, or receivables).

As a result of on-going competitive pressure, banks moved to sustaining profits and
increasing operating efficiency through the rationalisation of branch networks; the
migration of transactions out of branches to low cost electronic delivery systems;
and, the automation of back office processing.

In the drive for competition in the financial services sector, the regulatory and
technological barriers to entry have been substantially reduced, but some
impediments still remain. Foremost among these are:
   The strong brand recognition and established customer bases of the major
    banks;
   Taxes on financial transactions such as mortgage stamp duties and the banks
    debits tax, which reduce the incentive for consumers to change financial
    institution; and
   Increased returns to scale through technology and network infrastructure.

As a result of increased competition, there have been reductions in loan
establishment fees and interest margins, particularly for small business, and this will
be discussed in further detail in this Report.




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      k p mg Consulting                                          Small Business Banking in Australia
                                                                                    February 2002




4     Small business in Australia

4.1   The definition of ‘small business’
      There is no widely adopted definition of „small business‟ in Australia, especially in
      relation to banking services.

      Different participants in this market adopt differing definitions.
         Australian banks – define a small business as one with turnover between $1m -
          $5m.
         Australian Bureau of Statistics (ABS) – defines small business to include all non-
          agricultural businesses that employ less than 20 people.
         Australian Financial Services Reform Act 2001 – defines small business as
          employing less than:
          -   If the business is or includes the manufacture of goods – 100 people; or
          -   Otherwise 20 people.
         RBA uses loans under $500,000 as a proxy for small business lending.

      A similar lack of clear definition applies internationally. For example:
         The Bank of England identifies that there are multiple working definitions in use
          in the UK including:
          -   Those firms employing less than 50 people (Department of Trade & Industry);
          -   Turnover of maximum (Euro) 7m, balance sheet of maximum (Euro) 5m,
              maximum of 50 employees & no more than 25% of business owned by one,
              or jointly owned by several enterprises not satisfying the same criteria
              (European Commission);
          -   Turnover maximum ₤2.8m, balance sheet maximum ₤1.4m, maximum 50
              employees (Companies Act);
          -   (For statistical purposes) annual account turnover of up to ₤1m (British
              Bankers Association).
         UK Cruickshank Report – A small business is a business which is “too small to
          access public debt or equity markets directly, but large enough to be no longer
          de facto treated as a personal customer”.

      In this Report, we have generally adopted the definition used by the ABS, but
      because of the lack of consistency of definitions in different data sources, we have
      been forced to use alternative definitions when drawing on our research.


4.2   The Australian small business market
      According to Australian Bureau of Statistics 2000/2001 estimates, the Australian
      small business sector has the following characteristics:
         There are 1,075,000 small businesses in Australia;
         Small businesses make up 96% of all businesses in Australia;

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      k p mg Consulting                                                    Small Business Banking in Australia
                                                                                              February 2002



           50% of small businesses are non-employing (sole proprietorship) and 50%
            employ less than 20 people;
           Australian small businesses employ 3,181,000 people;
           The number of small businesses is proportionate to the population size - NSW
            has the greatest number of small businesses and NT the least.


                                     40%

                                     35%
             % of small businesses




                                     30%

                                     25%

                                     20%

                                     15%

                                     10%

                                     5%

                                     0%
                                           NSW   VIC   QLD   SA      WA         TAS       ACT         NT
                                                               State


      Figure 1: Proportion of small businesses by State


4.3   Bank lending to small business
      Small business is a significant market for Australia‟s banks.

      Bank lending to small business totals approximately $66 billion, and in the year to
      September 2001, banks issued $25.5 billion in new credit approvals to small
      business.3




      3
          RBA: New credit approval statistics for September 2001 quarter

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      k p mg Consulting                                         Small Business Banking in Australia
                                                                                   February 2002




5     Small business banking products
      This Section of the Report reviews the wide range of banking and financial products
      and services available for small business in Australia.

      Tables 1 and 2 in Section 5.5 compare the key features of these products.

      Section 6 of the Report covers the range of providers of these products and
      services.


5.1   Money transmissions
      Money transmission is the flow of money between individuals, businesses and
      government via a range of payments systems. Such systems also incorporate the
      clearing and settlement of funds between banks and financial institutions, their
      clients, and merchants.

      For the majority of small businesses, cash, cheques, and credit cards are the main
      vehicles of exchange. Without effective and efficient access to money transmission
      systems to handle these vehicles, small business will be at a distinct disadvantage.

      For those small businesses with a high volume of cash and cheque transactions,
      access to a „local‟ facility (branch, agency or franchise) is essential.

      As discussed in Section 6 of this Report, there are changes taking place in the
      provision of „local‟ facilities for small business.

      With regard to electronic transactions (in particular credit, and, to some extent, debit
      cards), the RBA is currently reviewing the arrangements in Australia. It has issued a
      Consultation Document, and is awaiting submissions from interested parties before
      its deadline of March 15.

      It is difficult, at this stage, to forecast what developments will emerge from this
      Review.


5.2   Cash collections
      An emerging service to small business current account holders offered by many of
      the main banks as well as new non-financial organisations (such as Mayne Logistics
      Armagard and Chubb Security Services) is a cash collection service.

      This involves the secure pick-up of cash deposits from small businesses, which are
      then processed and deposited into their accounts.

      For example, Mayne Logistics Armagard offers a cash collection service, specifically
      tailored to the needs of small business which is designed to “reduce your current
      banking costs with protection that doesn’t advertise that there’s cash around”.

      Mayne states that this service is designed for smaller, lower cash turnover
      businesses where it can actually be cheaper to use this service rather than using the
      staff of the small business itself for banking purposes.

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        k p mg Consulting                                            Small Business Banking in Australia
                                                                                        February 2002



        The key benefit of this service is that it provides greater security to small
        businesses; staff do not have to carry large amounts of cash or keep it on the
        premises until they can get to bank it.

        Both Armagard and Chubb have advised that they provide this service in non-
        metropolitan areas.


5.3     External finance
        As small businesses develop, their financing needs change. Getting access to the
        right type of finance at key stages in their growth can be crucial to the continuing
        success of the business.

        While, in the early stages of development, many small businesses may rely on
        internally generated finance (eg from savings, family, friends and retained earnings),
        continued growth and success invariably relies on access to external finance.


5.3.1   Debt finance

        Debt finance is lent by the provider for an arranged rate of return (interest).

        After internally generated finance, it is the major source of finance for small
        businesses.

        Traditional debt financing products include overdrafts and term loans.


5.3.1.1 Overdrafts

        Overdrafts comprise an extension of credit by a lending institution to cover the
        amount by which withdrawals exceed deposits in a current account.4 They are of
        particular relevance to small business.

        Cash flow is the lifeblood of any business, and daily cash flow is critical to business
        success5. For small businesses there are times when cash flow is tight, for
        example, due to seasonal fluctuations, unforeseen circumstances, or a slow down in
        the operating cycle.

        An overdraft is a convenient and flexible way to cover the day-to-day spending; help
        cash flow run smoothly and make it possible to take advantage of opportunities
        (such as supplier discounts for immediate payment) as they arise.6


5.3.1.2 Term loans

        Term loans may also be known as ”fully drawn advances”.


        4
          Source: www.investorwords.com
        5
          Source: www.asb.co.nz (ASB Bank – the NZ subsidiary of the Commonwealth Bank).
        6
          Source: ASB Bank and Westpac websites

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        k p mg Consulting                                         Small Business Banking in Australia
                                                                                     February 2002



        They are for a fixed term, which can be for a number of years if the business is
        regarded as stable. A pattern of repayments is generally required over the term of
        the loan.

        Term loans are available up to 15 years.


5.3.2   Alternative debt products

        An extensive range debt finance products have evolved to meet small businesses
        financing needs.

        Many of these have been developed to extend small businesses access to capital to
        the maximum extent within the constraint of small businesses capital structure (a
        sustainable mix of debt and owners capital).

        Unfortunately, it is not possible to determine, from publicly available data, the level
        of uptake by small business of these alternative debt products. More in-depth
        surveys of providers and small businesses would be required.


5.3.2.1 Hire purchase

        A Hire Purchase Agreement is a contract which allows small businesses to
        purchase goods over a predetermined period with guaranteed ownership at the end.

        Equity is increased with each payment and the business may decide to purchase at
        any time during the contract.

        Monthly payments can be structured to suit cash-flow, and a deposit may be paid if
        so desired.


5.3.2.2 Leasing

        A lease is an agreement whereby an owner, the lessor, rents goods to the small
        business, the lessee, who uses the goods to earn assessable income. The user
        must show the lease on their balance sheet as an asset with a corresponding
        liability.

        Finance lease agreements must have a residual or lump sum, which represents the
        potential sale price of the goods at the end of the lease term. At the end of the lease
        term the user must pay the residual amount. This can be done by re-leasing for
        another term, or offering to buy the asset, (usually for the amount of the residual), or
        trading the asset for a replacement and paying any shortfall or keeping any profit.

        In most cases, lessees can claim the full amount of the rental payments as tax
        deductions.




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          k p mg Consulting                                         Small Business Banking in Australia
                                                                                       February 2002




5.3.2.3 Factoring

          Under a Factoring facility the financial institution effectively buys the outstanding
          sales invoices of the small business.

          When the business needs to draw funds the financial institution will pay up to 90% of
          their value. The debtors then pay the sales invoice, when due, directly to the
          financial institution, and it, in turn, refunds the remaining 10% to the small business.

          Factoring means that the small business can use its debtors to finance new orders,
          buy raw materials, or even expand the business, without taking on new borrowings
          or mortgaging real estate assets.

          The facility also effectively outsources debtor administration to the financial
          institution.


5.3.2.4   Invoice discounting

          Invoice Discounting is a confidential finance service that has been developed to
          meet the working capital requirements of growing companies.

          The service provides a line of credit whereby companies can use its outstanding
          debtors in a more productive manner in order to achieve profitable growth.

          Invoice Discounting allows funds to be drawn as required up to the limit determined
          by sales invoices accepted by the financial institution. As accounts are settled the
          outstanding amount is reduced. Interest is paid only on the daily balance resulting in
          lower interest costs than many fixed finance arrangements.


5.3.2.5 Inventory Loans

          These are really term loans which use the inventory of the business as security.


5.3.2.6 Mortgage loans

          These are loans provided generally by non-financial institutions such as
          accountants, solicitors, and investment companies.

          They are generally short term in nature (1-2 years) and may be used by small
          businesses having difficulty accessing finance through financial institutions.


5.3.3     Equity finance

          Equity finance (Owners or Investors) is the key to a business maintaining a
          sustainable capital structure. If a small business does not have access to the levels
          of equity finance it needs to sustain their capital structure, they will have problems
          accessing debt finance. Access to equity finance is essential to start up businesses
          or to assist existing businesses to grow. That is, it is more likely to be important,


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                                                                                              February 2002



        either at the very early stages of a business growth cycle, or at key stages of
        expansion.

        This finance is often invested in the business for a share of the business profits.
        Investors of equity capital expect higher returns than the cost of debt finance
        because the value of their capital is at risk of poor performance by the business.


5.3.3.1 Business angels

        Business Angels are organisations specialising in „business angel‟ introduction
        services, which can assist proprietors in presenting their investment opportunity to a
        number of potential investors.7


5.3.3.2 Venture capital

        Venture Capital is funds that are made available through corporations or financial
        companies for start-up firms and small businesses with an exceptional growth
        potential. Managerial and technical expertise is often also provided.


5.3.4   International trade finance

        The banks, government agencies, and other financial services institutions provide a
        range of specialist services for businesses involved in international trade.

        This finance generally takes the form of overdrafts or term loans.

        It can be arranged in foreign currencies as well as Australian dollars. Loans of this
        type can be in the form of a multi-currency facility that allows the borrower to switch
        between currencies.


5.3.4.1 Importers
        The banks offer finance to small businesses to cover times where an overseas
        supplier requires payment before shipment, or on immediate receipt of the imported
        goods.
        The banks effectively establish the credibility of the small business with an overseas
        supplier by establishing a guarantee with the exporter‟s bank.


5.3.4.2 Exporters
        Export Finance is ideally suited to producers who supply products to an exporter. It
        provides the small business with interim finance from the time of sale to the time the
        exporter pays for the goods.
        To facilitate cash flow, the small business can receive, at the time of delivery to the
        exporter, typically up to 85% of the value of the products supplied, without the need
        for further security.

        7
            Source: Australian Venture Capital Association at www.avcal.com.au.

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5.4   Product innovation – international comparisons
      Australia has been assessed as having a moderate overall level of innovation in
      banking products for small business.

      The Cruickshank Report8 investigated the approach to innovation in small business
      banking across a range of countries, using a scale of 1 to 6, where 1 equals most
      innovative and 6 is least.

      Against this scale Australia scored a 3 overall compared with the UK (3), US (1),
      Canada (3), France (5) and Germany (5).

      Looking at the assessment in detail, Australia has an innovation rating of 3 for
      current accounts, secured and unsecured loans, hire purchase and invoice
      discounting, but is less innovative (4) in the area of leasing and factoring for small
      business.

      Innovative activity linked to small business banking products has been closely
      associated with developments in delivery systems.


5.5   Summary
      An essential banking requirement for small businesses, especially those handling
      cash and cheques, is a convenient „local‟ facility to provide money transmission
      services.

      Notwithstanding the increasing use of electronic transactions (credit and debit cards
      etc), cash and cheques are still very important to small business. Section 8 of this
      Report discusses this matter in more detail.

      The range of products and services available to small business from banks and
      other institutions in Australia has been increasing over recent times. They have
      often been specifically developed to meet the very diverse needs of small business.

      The wide range of products, and their key characteristics, are summarised and
      compared in Tables 1 and 2 on the following pages.

      Although there is a wide range of external financing products available, the most
      traditional approaches to external financing for small businesses are overdrafts and
      term loans. These products are easily accessible for most small businesses, making
      them the first choice for business debt finance.

      Alternative products are generally more appropriate for businesses at different times
      in their growth cycle, or to enable access to debt finance in addition to overdrafts
      and term loans.

      For example, hire purchase or leasing may be used by some businesses to acquire
      assets in place of traditional term loans, or, more likely when they cannot access
      more debt.


      8
          op cit

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                                                                             February 2002



Factoring, or invoice discounting (which provide short term working capital), are
more likely to be used in addition to overdrafts to access further debt finance and to
smooth out cash flow.

Finally, Australia has been assessed in comparison with other major economies, as
being moderately innovative in the introduction of banking and financial products for
small businesses.




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     k p mg Consulting                                                                                               Small Business Banking in Australia
                                                                                                                                        February 2002




                                        Table 1: Key features of finance products used by small business

                                   Overdraft                   Term Loans                 Accepted Bills            International trade finance

Providers                 Banks, Building                Banks, Building             Banks                          Banks
                          Societies, Credit Unions,      Societies, Credit Unions,
                          Finance Companies.             Finance Companies.
Features                  An overdraft is                Also known as ”fully        Bank Bills are more            Overdrafts term loans; etc
                          established by allowing a      drawn advances”. They       commonly available for         can be arranged in foreign
                          debit balance in a normal      are for a fixed term,       financing amounts in           currencies as well as
                          account up to an agreed        which can be for a          excess of $500,000.            Australian dollars. Loans of
                          limit.                         number of years if the      Bank Bills are discounted      this type can be in the form of
                          It is a short-term form of     business is regarded as     (ie, sold) to third parties    a multi-currency facility that
                          finance that is always         stable. A pattern of        which effectively become       allows the borrower to switch
                          payable “at call”.             repayments is generally     the providers of finance.      between currencies.
                                                         required over the term of   When the Bills mature the
                                                         the loan. Term loans are    party holding the bills has
                                                         available up to 15 years.   a claim on the bank for the
                                                                                     full face value of the bill.
Advantage                 Being “at call”, overdrafts    Normally the longest        Main advantage is cost.        Foreign currency products
                          are short-term loans and       term financing available                                   help manage foreign
                          therefore cheaper than         for small business.                                        currency risk.
                          longer-term loans.             Usually cheaper than
                          They are convenient as         other alternative means
                          there is no need to re-        of financing non current
                          apply or renew the             assets.
                          facility as long as the
                          bank is comfortable
                          continuing to provide the
                          facility.
                          They are flexible as
                          funds not required are
                          not borrowed.


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                                                                                                                                        February 2002




                                          Table 1: Key features of finance products used by small business
Uses                        Smoothing fluctuations in      Purchases of non-current   Can be used for both short    Can be used for both short
                            working capital                assets such as land and    and longer-term               and long-term requirements,
                            requirements. Eg. To pay       buildings, and plant and   requirements. Often used      but should only be used
                            for raw materials and          equipment.                 to finance core debt.         when a foreign exchange risk
                            supplies, and to pay                                                                    is being offset.
                            wages and overheads for
                            the period it takes to
                            convert these into cash
                            flow.
Costs                       Once-only                      Once-only                  Once-only „establishment‟     Depends on the type of loan,
                            „establishment‟ fee.           „establishment‟ fee.       fee.                          but the usual one-off
                            Interest rate, including       Interest rate, including   Discount rate (equiv. to an   establishment fee and regular
                            risk margin.                   risk margin.               interest rate).               interest charges may be
                            Unused limit fee.                                         Acceptance fee (equiv. to     expected.
                                                                                      a risk margin).
                                                                                      Line fee.
Security                    Fixed charge over              Fixed charge over          As with other bank            As with other bank facilities.
                            specific assets, or            specific assets, or        facilities.
                            floating charge over all       floating charge over all
                            assets.                        assets.
Amount                      Depends on requirement         Depends on                 Depends on requirement,       Depends on requirement,
                            & security.                    requirement, security      security and capacity to      security and capacity to
                                                           and capacity to repay.     repay.                        repay.
Repayments                  No repayment                   Usually made quarterly     Reductions are usually        As with equivalent Australian
                            requirement, but               during the term of the     required quarterly.           dollar facilities.
                            fluctuation according to       loan, although other
                            need is expected.              arrangements may
                                                           apply.
Review Required             Annual                         Annual                     Annual                        Annual




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    k p mg Consulting                                                                                              Small Business Banking in Australia
                                                                                                                                      February 2002




                      Table 2: Key features of financial products used to extend access to finance to small business


                 Equipment Leasing                                 Accounts Receivable
                                                 Factoring                                       Inventory Loans            Mortgage Loans
                                                                         Financing
Providers       Banks, Building            Banks and Finance       Banks and Finance           Banks and Finance        Accountants, Solicitors,
                Societies, Credit          Companies.              Companies.                  Companies.               and investment
                Unions, Finance                                                                                         companie.
                Companies.
Feature         Leasing is a way of        A businesses            Different to factoring in   Term loans are           Alternative to Financial
                paying for the use of      accounts receivable     that receivables are        provided using           Institutions. General
                an asset without           can be sold, thereby    used as security for a      inventories as           short term - 1 to 2
                owning it. Generally it    enabling cash to be     loan.                       receivables.             years. However
                is more expensive          received earlier than                                                        providers are unable to
                than term loans.           what it would be,                                                            be flexible if there is a
                                           under a businesses                                                           default on the loan.
                                           usual credit terms.
Advantages      Allows term loans to       Can enable more         Makes more working        Makes more working         Often used by small
                be used for longer-        working capital         capital finance available capital available to the   businesses that have
                term purposes, and         finance to be           to the business.          business.                  problems accessing
                helps avoid using an       obtained than would                                                          finance through other
                overdraft to finance       be available with                                                            financial institutions.
                plant and equipment.       only an overdraft.
                Leasing finance is the     There are
                most readily available     administrative
                form of finance            conveniences of not
                available to small         having to send
                business. The full         statements to
                value of the               customers, follow up
                equipment is               late payments and
                financed.                  incur bad debts.




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    k p mg Consulting                                                                                             Small Business Banking in Australia
                                                                                                                                     February 2002




                      Table 2: Key features of financial products used to extend access to finance to small business

Uses            Can be arranged for a      For financing           For financing accounts   For financing              Often used to finance
                wide variety of plant      accounts receivable.    receivable.              inventory. For             core debt of small
                and equipment.                                                              example motor              business.
                                                                                            vehicle dealers use
                                                                                            this type of finance in
                                                                                            the form of a floor
                                                                                            plan for financing their
                                                                                            vehicle stocks.
Costs           Financing and similar      A factoring charge      A regular interest       A regular interest         These vary, but there is
                costs are recovered        expressed as a          charge.                  charge.                    always a regular
                through a regular          percentage of                                                               interest charge. Rates
                payment.                   receivables.                                                                will be higher if a
                                                                                                                       second mortgage.
Security        The item being             The receivables         The accounts             The inventory being        Commercial or
                leased.                    being factored.         receivable being         financed.                  residential real estate.
                                                                   financed.                                           Can be a second
                                                                                                                       mortgage.
Amount          The full purchase cost     Up to the balance of    Up to an agreed          Up to an agreed            Amounts vary.
                of the equipment.          accounts receivable,    balance, say 70% of      percentage of the
                                           less charges.           accounts receivable.     value of the inventory
                                                                                            being financed.
Repayments      Included in the regular    Not applicable (the     Depends on               Depends on                 Can be interest only or
                rental payments.           finance provider        arrangement, but         arrangement, but           principal and interest.
                                           receives the cash       normally a regular       normally a regular
                                           from the                payment.                 payment.
                                           receivables).
Review          Minimal                    No formal annual        No formal annual         No formal annual      Interest rate is likely to
Required                                   review, although        review, although         review, although      be reviewed annually.
                                           factoring               regular re-assessment    regular re-assessment
                                           arrangements can        may be expected.         may be expected.
                                           be cancelled at any
                                           time by either party.

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                                                                                                       February 2002


6       Providers of banking services
        Cannex9 has identified 57 financial institutions in Australia which offer small business
        debt finance products, and 44 which offer business transaction accounts.

        In total, these institutions offer 792 financial products and services to small businesses in
        Australia.

        Examples of specific providers and the products/services they offer are included in
        Appendix A.


6.1     Providers of transaction accounts

6.1.1   The overall picture

        In the transaction account market, banks provide 58% of all business transaction
        accounts10.


              70%
                                58%
              60%

              50%

              40%
                                                                                       26%
              30%

              20%                                          15%
              10%

                0%
                               Banks                Building Societies            Credit Unions


        Figure 2: Percentage of business transaction accounts offered by each provider11


6.1.2   Credit Unions and Building Societies

        Despite the banks share of the deposit market, small business use of credit unions and
        building societies has increased over time and spans most deposit products such as
        interest bearing cheque accounts, cash management accounts, and term deposits12.

        In June 1997, virtually no small business used credit unions and building societies.




        9
          Cannex unpublished data. 2002
        10
           Note that this figure is the proportion of all transaction accounts available to small business – not market
        share.
        11
           Source: Cannex unpublished data 2002
        12
           Source: Greenwich Associates, 2000

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        However, by December 2000, data shows an increase to 4% of small businesses using
        credit unions and building societies for deposits.

        Without detailed surveying of small businesses it is not possible to determine the reason
        for this shift.


6.1.3   Regional banks

        An interesting shift in positioning has taken place with the regional banks, which have
        strengthened their market share of debt and deposits at the expense of other banks/
        financial institutions (such as credit unions and building societies)13.

        Regional banks have doubled their shared of deposits to an estimated 12% and seen a
        20% increase in their share of debt to 11%14.


6.2     Debt financing providers
        Small business debt financing products include business overdrafts, leasing (provided by
        only 4 institutions), reference rates and term lending.

        Cannex data shows that banks are the main providers of financing products in this
        market (53%) followed by „other‟ providers such as mortgage originators (21%) credit
        unions (18%) and building societies (9%).


                     21%
                                                                   Banks

                            12 ‘other’
                              orgs
                                                                   Credit Unions

                                                  30
              9%     5 B. Socs.                 banks
                                                             53%   Building Societies


                           10 Credit
                           Unions                                  Other (Finance
                                                                   Companies, Mortgage
                                                                   Originators etc)
                    18%


        Figure 3: Percentage of small business financing providers in the marketplace15

        It is clear that the providers of debt financing to small businesses in Australia extend
        significantly beyond the major and regional banks.

        In order to determine whether there is sufficient availability of debt finance to meet the
        needs of small business, it would be necessary to survey both small businesses to
        ascertain its views, and banks to determine the rejection rate.


        13
           Source: Greenwich Associates unpublished data
        14
           ibid.
        15
           Source: Cannex unpublished data 2002

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        However, given that, according to the RBA16, in the year to September 2001, banks
        provided over $25 billion of loans to small business, which is around 38% of the total
        amount outstanding of $66 billion, we can infer that debt finance is relatively freely
        available.


6.2.1   Finance companies

        Finance companies are included under the “other” category in Figure 3 above. The
        following are examples of the debt products and services that finance companies offer to
        small business.




        16
             op cit

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6.3     Other emerging service providers
        Other providers of banking and financial services to small businesses are emerging.

        They generally work in co-operation with the banks to offer financial services through
        alternative channels, and especially to provide the „local‟ facility which is so essential for
        small businesses which handle cheques and cash.

        While these are relatively small at this stage, their penetration is expected to grow.


6.3.1   GiroPost

        GiroPost is a service offered by Australia Post which enables customers of 76 financial
        institutions to process electronic banking transactions at 2,800 Australia Post outlets.

        While these services have been aimed primarily at personal banking customers, there
        are specific initiatives being piloted to provide services to small businesses.

        One example of these initiatives is the joint venture between Australia Post and the
        Commonwealth Bank of Australia (CBA).

        During 2001, CBA and Australia Post piloted a service that provides business banking
        transaction services to rural areas through postal outlets. Key features of the service are:
            -   Cash and cheque deposits;
            -   Overnight credits to customer‟s accounts;
            -   Withdrawals; and
            -   One-stop convenience for bill payments, business and personal banking, and all
                postal needs.

        The pilot was successful and now continuing. This service is currently running in 120
        Australia Post shops around Australia, and is expected to expand to over 200 in 2002.

        Other banks also offering services through GiroPost include:
           Adelaide Bank
           Bank of Queensland
           BankWest
           Bendigo Bank
           Citibank
           HSBC
           Members Equity
           National Australia Bank
           St George Bank

        However, it is not clear from published data the extent to which these banks offer
        services to small business through GiroPost.




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6.3.2   Franchises, agencies and ‘in-store’ facilities

        A wide range of initiatives is under way in Australia to provide „local‟ facilities for banking
        as the number of full-service bank branches decreases17. For example, banks have
        introduced a number of alternatives to branches that offer new services.

        These include the Bendigo Bank franchising community banks with support from local
        communities and in particular, small businesses in those communities.

        In fact, the Bendigo community banks are offering investment products such as the
        Regional Investment Fund to promote small business growth in the regions.

        The Federal Government is funding the rolling out of Rural Transaction Centres, and is
        subsidising more GiroPost outlets.

        Banks are also developing alliances with rural service providers such as fertiliser
        companies, and stock and station agents to provide financial services to the agricultural
        sector. 18

        While the main focus of many these initiatives to date has been the personal customer,
        increasingly services are expected to be provided to small business.


6.4     Equity finance providers
        Equity finance appears to be an area of banking and financial services which is of
        interest to a limited number of small businesses.

        It is not possible to ascertain the size, number, or total value of investments made in the
        small business sector, since these are not separately reported.

        However, such equity capital is generally sought after by companies with some key
        characteristics. They are generally companies with high potential and strong aspirations
        for growth; or, they may be highly attractive to potential investors because they operate in
        high technology, or bio-technology/life sciences markets.

        In both cases, the equity finance is typically sought in either or both of the start-up phase
        and the growth phase of these businesses.

        As a consequence, equity capital, although important to certain companies, is not of
        particular importance and interest to the majority of small businesses and banking
        financial services providers.19

        One possible behavioural reason that entrepreneurial small businesses are less likely to
        seek equity finance is because the owners do not wish to relinquish their total control of
        the business through the sharing of ownership.

        The Australian Venture Capital Association Limited (AVCAL)20 website lists providers of
        equity finance under the following categories:



        17
           Source: ABA Fact Sheet
        18
           Source: ABA Fact Sheet.
        19
           RBA Bulletin on Small Business Lending, 1997
        20
           www.avcal.com.au

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6.4.1   Venture capitalists

        Venture capital fund managers generally have more than $15 million under management,
        and act as principal or agent for venture capital investor(s).

        Examples include:
           -   Allen & Buckeridge Pty Ltd
           -   Australian Technology Group
           -   First Corporate Group
           -   Venture Capital Wizards.com


6.4.2   Business Angels

        These are organisations specialising in „business angel‟ introduction services, which can
        assist proprietors in presenting their investment opportunity to a number of potential
        investors.

        Examples Include:
           -   Australian Business Limited provides a special equity raising service jointly with
               Westpac Bank, called “Australian Business Angels”.
           -   East Coast Angels Pty Ltd
           -   Invest-Ex
           -   TiNSHED


6.4.3   Incubators

        These are organisations which provide a range of business services and assistance to
        entrepreneurs who wish to establish a business.

        Examples include:
           -   BlueFire Innovation
           -   Epicorp Limited
           -   InQbator
           -   The Icehouse


6.4.4   Banks as equity providers

        Banks are also able to provide equity finance, but only a small number of banks have
        taken advantage of the relaxation in policy aimed at facilitating their making modest
        equity investments in non-financial businesses.

        Most banks appear to be unattracted to this type of investment because of the greater
        risks involved and the potential for conflict of interest to arise where a bank is both an




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                                                                                                   February 2002


        investor in and lender to a business. The few reported investments of this nature have
        tended to be in the medium rather than small business.21


6.5     Market Share

6.5.1   The overall picture

        In Australia, over the past five years, the four major banks have, for the most part,
        retained their market share of debt at 78-80% and deposits at 82-84%.

        Trends have shown that the share of debt among the major banks rose from an
        estimated 79% in June 1993 to a peak of 83% in June 1995, and has since steadied at
        78-80%22.

        As stated above, the regional banks have strengthened their market share at the
        expense of other banks/financial institutions (such as credit unions and building societies
        and finance companies).

        Regional banks have doubled their shared of deposits to an estimated 12%, and seen a
        20% increase in their share of debt to 11%23.

        RBA data shows that banks issued 80% of all loans and advances in Australia, of which
        business loans and advances comprised 65%.24

        The banks‟ share of the small business market is consistent with their share of the overall
        credit market.


6.5.2   The regional picture
        In Australia, the market share of the banks differs State-by-State as shown in the
        following data from the 1999 Yellow Pages Small Business Index Survey.25




        21
           Source: RBA Bulletin on small business lending, 1997.
        22
           Source: Greenwich Associates.
        23
           Source: Greenwich Associates unpublished data.
        24
           RBA: Credit Aggregates data for as at November 2001.
        25
           Yellow Pages Small Business Index: Special Report on Attitudes to Banks & Other Financial Institutions

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k p mg Consulting                                                            Small Business Banking in Australia
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             State             Top 4 Share of Market (%)                   Other Dominant Banks

             NSW                              75%                     St George (10%), Colonial26 (5%)

              VIC                             90%                             Bendigo Bank (3%)

             QLD                              78%                         Bank of Queensland (8%)

              SA                              69%                       Bank of South Australia (21%)

              WA                              79%                               Bank West (20%)

             TAS                              66%                               Trust Bank (28%)

              NT                              88%                       Bank of South Australia (4%)

             ACT                              63%                      St George (24%), Colonial (5%)

Table 3: Australian banks market share by State27


      In NSW, the CBA has 28% of the small business market. The largest „non-major‟ is
       St George (10%).

      In VIC, both the CBA and NAB have 28% of the small business market. Few small
       businesses use a „non-major‟ financial institution.

      In QLD, the NAB is the main financial institution for 29% of small businesses. No
       other institution accounts for more than 20%.

      In SA, the CBA has 23% of the market, the ANZ 22% and the Bank of South Australia
       21%.

      In WA, the NAB has 31% of the small business market with no other financial
       institution accounting for more than 20%.

      In TAS, 28% of small businesses use the Trust Bank as their main financial
       institution. Of the „majors‟, only the ANZ exceeds 20% (23%).

      In the NT, 40% of small businesses use the ANZ.

      In the ACT, 24% of small businesses use St George Bank, slightly more than the
       NAB (21%) and Westpac (20%).
So, despite the increase in the number of providers of banking and financial services to
small business over recent years, it is clear that a relatively small number of banks (both
major and regional) continue to have the lion‟s share of the market in both transaction
accounts and debt, and across all regions.




26
     This figure does not take into account the CBA Colonial merger.
27
     Market share in terms of being the main financial institution to small businesses in each State.

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        k p mg Consulting                                                          Small Business Banking in Australia
                                                                                                      February 2002


6.6     Market share distribution
        KPMG Consulting (UK) has described the relationship between a small business and its
        bank as being like any other: a mixture of „rational‟ and „non-rational‟ factors28.

        On the „rational‟ side of the equation are factors such as the cost of business banking
        services, the location of branches, the range of services, and so on.

        However, so-called „non-rational‟ factors also play a crucial role when small businesses
        choose a bank, given the emotional ups and downs of running a small business.

        Fear of bad times is often close to the owner‟s heart (and wallet), and factors which are
        not price or cost related assume importance. For example, knowing one‟s bank manager
        personally, and trusting that the bank will help the business through difficult times,
        become significant factors.

        There are several possible reasons for the banks having the greatest share of the small
        business sector.


6.6.1   Full-service provision

        An Australian study of “banking in the bush”29 found that the main reason a small
        business would choose a particular financial services provider was:

             “It services both my business and personal needs” (65%).

        It is possible that banks are preferred providers because they provide the full product mix
        – deposit-taking, lending, and transaction services, to customers as both business
        operators, and as personal customers – thereby making them a convenient „one-stop
        shop‟ for all banking needs.


6.6.2   Bank location and convenience

        The same rural banking study found that the next most important feature of a financial
        services provider is that it is:

             “Conveniently located” (39%).

        In total, banks have around 5,000 branches across Australia. The big four banks between
        them have more than 3,500 branches30.

        By contrast, the four largest credit unions in Australia between them have around 120
        branches, agencies, and service centres31.




        28
          KPMG Consulting UK, Research Report: The Last Real Relationship? Understanding the Future of Small
        Business Banking. 2001
        29
           Centre for Australian Financial Institutions: Banking in the bush: the Transition in Financial Sevices 1998
        30
           Source: RBA and APRA
        31
           Source: Web sites of Australian Central Credit Union, Australian National Credit Union, Credit Union of
        Australia, and Savings and Loans Credit Union

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        k p mg Consulting                                                      Small Business Banking in Australia
                                                                                                  February 2002


        So, notwithstanding recent branch closures, the more numerous bank branches are
        generally more conveniently located than alternative providers, especially when one
        considers the stated preference of small business for „face-to-face‟ banking (see Section
        8.1.1), and the essential requirements for a „local‟ facility for cash and cheque handling.


6.6.3   The cost of switching

        There are also costs to switching.

        Apart from the time taken to find a new supplier, there are risks that complex transactions
        may not be transferred smoothly from one provider to another.

        And the RBA32 has raised a suggestion that State imposed Stamp Duties may result in
        an additional cost for switching providers if loans have to be re-financed.


6.6.4   Credit risk management

        A core competency of banks which has developed over a number of years, and which is
        of particular relevance to small business, is credit risk management.

        Getting the right balance between more centralised lending decisions and local lending
        discretion often underpins the relationship between small businesses and their bank.

        A history of working with an individual small business through its growth phases and
        during its ups and downs, allows a bank (or other financial institution) to develop a better
        understanding of its track record and the capabilities of the owners.

        As a result, it is better able to respond in times of need to the requests of owners than
        would be the case of an alternative provider which doesn‟t have the same knowledge.

        Furthermore, any risk premium for finance can be better tailored to the capability of the
        business and may result in cheaper loans.

        Small business owners therefore are likely to develop a preference to stay with their
        existing provider, unless some significant factor intrudes to affect the relationship.


6.6.5   The power of the brand

        Brand is the set of perceptions in the minds of customers33 about a company.

        If an organisation creates the perception of being trustworthy or providing value for
        money, it is likely to be more attractive to customers than those organisations with less
        positive brands.

        Four of the top five most valuable brands in Australasia are banks34.




        32
           RBA: Report on The Australian Financial System in the 1990’s
        33
           From Interbrand CEO John Allert as cited in The Age Friday 30/11/2001
        34
           Source: Sydney Morning Herald, 30/11/2001

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      k p mg Consulting                                             Small Business Banking in Australia
                                                                                       February 2002


      The Commonwealth Bank was the bank with the most valuable brand, estimated to be
      $3.6 billion, followed by Westpac, ANZ and NAB at $3bn, $2.5bn and $2.3bn
      respectively.


6.7   Summary
      In Australia there are 57 financial institutions providing more than 720 debt finance
      products and services, and 44 financial institutions providing 72 transaction accounts to
      small businesses. It is clear that the provision of services to small businesses has
      extended significantly beyond the major and regional banks.

      In recent years credit unions, building societies, mortgage originators and other
      alternative providers have introduced services and products tailored for small
      businesses.

      Notwithstanding this, banks (both majors and regionals) have very significant market
      dominance in the provision of debt and current account servicing.

      The major reason for this is the greater number, and hence greater convenience, of
      „local‟ facilities provided by banks (around 5,000 branches in Australia, compared with
      around 120 service outlets for the four largest credit unions). As we have stated, „local‟
      facilities are essential for small businesses handling cash and cheques.

      Other reasons include the track record of the banks in assessing credit risk and using the
      knowledge of existing customers developed over the years to provide the required
      support at reasonable cost.

      And again, further factors include the perception of the brands of the major banks, and
      the convenience of „full-service‟ offerings.

      To counteract the reduction in branch numbers throughout Australia, many financial
      institutions are entering other arrangements (agencies, franchises – eg GiroPost with
      Australia Post) with third parties to make available „local‟ facilities (which are so vital to
      small business). While these were initially targeted at personal customers, increasingly
      they are being piloted for small business.

      There does not appear to be a difficulty for small business to access debt finance in
      Australia. In the year to September 2001, the banks advanced $25 billion in credit to
      business – around 38% of the total credit outstanding of $66 billion.

      There are a number of equity finance providers in the Australian market, but in the
      absence of detailed information, it is suggested that these are mainly servicing a small
      number of specialist and high potential companies.

      In addition, it appears that many capital-constrained businesses are actually quite
      reluctant to seek equity funding which will result in sharing ownership; probably because
      it means that the small business owner has to relinquish some control over the business.




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            k p mg Consulting                                                Small Business Banking in Australia
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7           Pricing
            The price of banking services is a key determinant of the effectiveness of those services
            for small businesses.


7.1         Transaction account pricing

7.1.1       The Australian position

            The transaction accounts at each of the financial institutions may differ in the level of
            service and products offered, but the range of prices shown below is indicative of the cost
            of transactional banking for small businesses.

                              Monthly Service Fee & Free              Additional Fees per transaction
              Bank
                               transactions per month
      Westpac                         $4.00 – $11.00                 Electronic: $0.18 - $5.00
                                2 - 40 free transactions per         Cheque: $0.44 - $5.00
                                           month
                                                                     Branch: $0.93 - $5.00
      National    Australia           $10.00 - $20.00                Over the Counter (OTC) transactions:
      Bank                                                            $0.70 per item
                                    no free transactions
                                                                     Non OTC transactions: $0.50
                                                                     Electronic: $0.20
                                                                     NAB ATM transactions: $0.50
                                                                     Non-NAB ATM transactions: $1.50
                                                                      plus electronic fee.
      Commonwealth                     $2.00 - $15.00                Non-OTC transactions: $0.20
      Bank
                               0 – 40 free transactions per          CBA ATM withdrawal: $0.25
                                          month
                                                                     Quick Deposit Box deposits: $0.25
                                                                      (cheques included in deposits: $0.40)
                                                                     Cheque transactions: $0.55 ea.
                                                                     Staff assisted transactions: $0.95
                                                                      each
      ANZ                             $10.00 - $15.00                Collections: $0.30 - $0.60
                               20 – 30 free transactions per         Staff assisted transactions: $0.60
                                          month
                                                                     ANZ ATM transactions: $0.40 - $0.60
                                                                     Cheques written: $0.40 - $0.60
                                                                     EFTPOS, phone banking & automatic
                                                                      transactions: $0.30 - $0.60
                                                                     Internet banking transactions: $0.20 -
                                                                      $0.60




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    k p mg Consulting                                                Small Business Banking in Australia
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St George / Bank               $6.00 - $10.00                Electronic transactions: $0.20
of South Australia
                       15 – 30 free transactions per         Cheque withdrawals: $0.40
                                  month
                                                             Branch transactions: $0.80
                                                             St George ATM transactions: $0.40
                                                             Other ATM transactions: $1.50
Bank of QLD                        $9.00                     Deposits (including each cheque) and
                                                              withdrawals: $0.35
                            no free transactions
Adelaide Bank                      $10.00                    Direct debits, OTC deposits, Adelaide
                                                              Bank ATM deposit, cheque deposits
                        $20 worth free transactions
                                                              & withdrawals: $0.50
                                per month
                                                             Adelaide    Bank    withdrawals   &
                                                              transfers,    foreign     non-metro
                                                              withdrawals, transfers & enquiries,
                                                              EFTPOS transactions: $1.00
                                                             OTC withdrawal and transfers &
                                                              GiroPost withdrawals, transfers &
                                                              enquiries: $2.50.
Bendigo Bank                  No monthly fee                 Fee for excess transaction on any
                                                              facility $0.70
                         30 free transactions per
                                   month                     Non Bendigo Bank ATM withdrawal
                                                              $1.25
                                                             Cheque deposit: $0.70 per chq
                                                             GiroPost withdrawal: $2.00
Suncorp Metway                 $5.00 - $10.00                Excess transaction fees: $0.35 per
                                                              transaction
                       5 – 20 free transactions per
                                  month                      Cheque deposit: $0.30 each chq
                                                             Non      Suncorp    Metway           ATM
                                                              transactions: $0.35
Savings and Loans      No account keeping or base            S&L Branch or Agency transactions:
Credit Union (S&L)            service fees                    $0 - $2.00 (depending on member
                                                              status)
                       20 – 40 free transactions per
                                  month                      S&L ATMs: $0 - $1.00 (depending on
                                                              member status)
                                                             Other ATMs: $2.00
                                                             EFTPOS transactions: $1.00
                                                             Deposits: Free
                                                             GiroPost withdrawals: $2.00




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        k p mg Consulting                                                             Small Business Banking in Australia
                                                                                                         February 2002



   CONNECT          Credit              No monthly fee                      All staff assisted transactions: $0.60
   Union
                                     No free transactions                   All self-service transactions: $0.30
                                                                            Collection fee on cheques deposited:
                                                                             $0.45
                                                                            Non-CONNECT ATM transactions:
                                                                             $0.50
                                                                            Cash handling fees: $2.00 - $10.00
   Newcastle                                  $10.00                        Deposits,     cheques       &          debit
   Permanent                                                                 transactions: $0.40 per item
                                   15 free transactions per
   Building Society
                                             month                          Branch cash withdrawals: $1.00
   (NPBS)
                                                                            NPBS ATM deposits: $5.00 each
                                                                            Foreign ATM withdrawals: $1.25
                                                                            Foreign ATM enquiries: $1.00
                                                                            Direct debit transaction fee: $1.00
                                                                            Excess cash deposit fee: $5.00 per
                                                                             10 minutes.
   Hume           Building              No monthly fee                      Cheque deposit fee $0.20 per chq
   Society
                                 4 – 8 free transactions per                Personal cheque withdrawal: $0.30
                                            month
                                                                            OTC cheque withdrawal: $2.00
                                                                            EFTPOS withdrawals: $0.60
                                                                            EFTPOS rejections: $0.40
                                                                            Non-Hume ATM transactions: $1.00 -
                                                                             $1.25
                                                                            Hume ATM transactions: free

Table 4: Banking fees charged by providers of transaction bank accounts to small business35

       Table 4 above demonstrates the diverse range of competitive offerings available for small
       business in Australia.

       Prices differ from institution to institution as well as between channels offered.
       Furthermore, the prices set out above are those published by the financial institutions,
       but it is possible, particularly for business customers, to negotiate some fee
       arrangements.

       These differences should give small businesses some incentive to shop around in order
       to save money by changing service providers.

       Although it is beyond the scope of this study, a more detailed survey of both banks and
       small businesses would be needed to determine more precisely whether the banks
       offering the cheapest services also have the highest market share.

       On the surface, when comparing the prices above in Table 4, with the market share
       information in Table 3 in Section 6. 5 above, it seems that price is not a key determinant

       35
            Publicly available data sourced from the individual financial institution websites.

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           k p mg Consulting                                                          Small Business Banking in Australia
                                                                                                         February 2002


          in market share. Other factors are more important, and some of these have been
          canvassed in Section 6.6 above.

7.1.2     International pricing comparisons

          International comparisons should be viewed with some caution, particularly in an industry
          like banking where the different regulatory frameworks, and differing levels of
          Government intervention result in differing cost structures, market dynamics, prices, and
          profitability.
          Furthermore, different Governments apply differing approaches to support, and indeed
          subsidise in some cases, various industry sectors – small business and agribusiness in
          particular.

          Nevertheless, we have included the following international comparison data from the
          Cruickshank Report36 because it can provide some useful insights into different
          jurisdictions and the situation which prevails in each.

          The data shows that the cost of transactions in Australia is generally low compared with
          other countries.

          In fact, on the basis of this data, Australia has arguably the lowest charges for cash
          withdrawals and credits out of all six countries.

          The only area where Australia‟s charges are seemingly higher than the mean is for
          standing orders.

          Incidentally, the Cruickshank Report suggests that one of the factors possibly influencing
          the relatively lower prices in Australia is that it is perceived to be easier to switch
          provider.

                  10,000      8,000    2,000    10,000       100
                                                                    300 cash     450
 Country        automated automated   cheque   cheque     standing
                                                                   withdrawals credits
                collections payments payments collections  orders

 UK                 2674             2289            2743            5966             123             1243          660

 US                 2620             2966             594            2729              34                 71        437

 Canada             3266             2614            1783            9029              77             231           406

 Australia          2986             2391             577            2889             209                 37         83

 France             6066             4246              89             571             240             320           514

 Germany            2417             1446            1880            2320              23             260           429

 Mean               3338             2659            1278            3917             118             360           421

Table 5: Average charges by type of transaction (AU$)37




          36
               Op cit
          37
               The values in this table have been converted from ₤ at a rate of $0.35 as at 17/01/2002.

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          k p mg Consulting                                                                                                  Small Business Banking in Australia
                                                                                                                                                February 2002



      10000


      9000


      8000


      7000


      6000
$AU




      5000


      4000


      3000


      2000


      1000


         0
              10,000 automated 8000 automated         2000 cheque       10000 cheque         100 standing       300 cash           450 credits
                  collections     payments             payments           collections           orders         withdrawals
                                                                    Type of transaction


                                   UK            US            Canada            Australia            France          Germany


          Figure 4: Average charge for transactions by country (from Cruickshank)



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      k p mg Consulting                                              Small Business Banking in Australia
                                                                                        February 2002




7.2   The cost of debt finance
      There are two main types of fees payable on debt finance.

      First, an establishment fee (applying both to loans and overdrafts) is usually charged
      up-front as a fixed dollar amount; and, second, a continuing service fee is payable
      over the life of the loan, and which is a percentage of the loan.

      In general, these fees have decreased over recent years with the exception of term
      loan fees38 as shown below.

                     Loan fees                       1997       1998            1999           2000

      Loan establishment fee $100                    $925        $840           $740           $740
      000 loan

      Overdraft fee (%pa) on $100                    1.12        1.02           0.93           0.93
      000 loan

      Term Loan Fee (%pa) on $100                    0.37        0.41           0.45           0.45
      000 loan

      Contribution of fees to
      effective interest rates
      Yearly fee on 5-year overdraft
                                                     1.30        1.19           1.08           1.08
      (taking the annual line fee for an overdraft
      and spreading the establishment fee over
      the life of the loan)
      Yearly fee on 5-year term loan
                                                     0.55        0.58           0.60           0.60
      (taking the annual service charge for a
      term loan and spreading the
      establishment fee over the life of the loan)

      Table 6: Major Banks’ Small business loan fees

      Over time then, small businesses are generally paying less in charges for debt
      finance.
      Of particular interest to small businesses are fees on overdrafts, since this is a major
      source of short-term credit.
      The RBA estimates that establishment fees and line fees contributed 1.3 percentage
      points to effective interest rates on a $100,000 overdraft over 5 years in 1997. The
      comparison for 2000 is 1.08 percentage points – a 17% decline.

      In dollar terms this equates to $220 on a $100,000 overdraft.




      38
        Reserve Bank of Australia data provided to the House of Representative Standing Committee on
      Economics, Finance, and Public Administration

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        k p mg Consulting                                                Small Business Banking in Australia
                                                                                            February 2002




                       1.4   1.3
                                           1.19
                       1.2
                                                              1.08                 1.08
                        1
             Percent




                       0.8

                       0.6

                       0.4

                       0.2

                        0
                               1997           1998                1999                2000




        Figure 5: Contribution of establishment and line fees on a $100,000 overdraft
        to effective interest rates.39


7.2.1   Risk premiums for debt finance

        Australian banks and financial institutions are required by the Australian Prudential
        Regulation Authority (APRA) to hold capital in proportion to their assets (on a risk-
        weighted basis).

        Planned changes in the rules for risk weighting, to be introduced over the next few
        years, will tend to reinforce the risk premiums applied by the banks by requiring
        them to assign additional capital to sectors of the market which are considered by
        APRA to be relatively high risk.

        There is inherently greater difficulty in assessing the risk profile of individual small
        businesses because there is usually less information available; often a short track
        record for assessment; and, heavy reliance on the skills of the owner/manager40.

        This means that the risk of lending to this market is perceived to be very high and,
        as a result, finance providers apply a risk premium to small businesses for debt
        finance.

        Interest rates charged on small business debt finance comprise two components: an
        indicator rate, which banks vary from time to time (usually in response to changes in
        monetary policy) and a customer risk margin, which varies from customer to
        customer.

        Indicator rates are published by banks on a regular basis, but customer risk margins
        are not published because they are diverse and subject to negotiation between
        banks and their customers.41

        39
           Assuming establishment fee spread over 5 years.
        40
           RBA: Bulletin on Recent Developments in Small Business Finance, 1997.
        41
           RBA: Bulletin on Small Business Lending, 1997.

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        k p mg Consulting                                                Small Business Banking in Australia
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        We can get some indication of possible reasons for this higher level of perceived
        risk by looking at failure rates for small businesses.



7.2.2   Small business failure




        Figure 6: Business exit rates42 by employment size & age of business, 1994-94
        & 1995-9643
        Source: Productivity Commission Report 2000

        Although somewhat dated, the above graph is considered to be representative of
        the current situation. It shows that regardless of how long the business has existed,
        small businesses are more likely to cease operation than larger businesses.


7.2.3   Small business bankruptcies

        A report by the ABS44 lists the most common causes of bankruptcy for small
        business:
            Economic conditions 14.7%
            Lack of business ability 12.2%
            Lack of capital 9.7%
            Excessive interest (through debt over-commitment) 6.8%
            Excessive drawings 3.8%

        This information, in addition to drawing attention to the high reliance placed on the
        ability of the business owner, highlights the relative difficulties faced by small
        businesses in coping with changing economic conditions, which, in turn, lead to
        pressure on margins.

        42
           The number of exits by employing businesses as a proportion of the number of employing
        businesses in the relevant category.
        43
           Averages for the two years
        44
           ABS, Small business in Australia 1999.

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                   k p mg Consulting                                                  Small Business Banking in Australia
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                  The lack of access to capital and debt over-commitment highlight the need for small
                  business to maintain sustainable capital structures by having appropriate levels of
                  equity capital in their businesses to support their use of debt finance.

                  These factors increase the risk of lending to small business.


7.3               Changes in interest margins and bank fees45
                  As part of our research framework (see Section 2.1), we are seeking to assess
                  whether prices to small businesses for banking services are reasonable.

                  Two key determinants in the prices paid by small businesses are interest rates, and
                  bank fees. There have been significant changes in these over recent years.


7.3.1             Interest margin changes

                  Over recent years, as the level of competition in debt financing has increased
                  through the entry of new providers into the market, banks have tended to earn lower
                  net interest margins (the difference between the interest rate paid on borrowings
                  and the rate earned on lendings).

                  Interest margins have narrowed over time because of:
                         Introduction of new, lower cost products by banks (to meet increased
                          competition); and
                         Reduction in risk margins that reflect the improved quality of assets offered for
                          collateral.

                        14.0                                                                                            6.00
                                      5.41
                        12.0                       5.05
                                                                4.84                                                    5.00
                                                                            4.36
                        10.0                                                                                                   % interst margin
                                                                                      3.78                              4.00
        Interest rate




                         8.0                                                                       3.44
                                                                                                                3.27
                                                                                                                        3.00
                         6.0
                                                                                                                        2.00
                         4.0

                         2.0                                                                                            1.00

                         0.0                                                                                            0.00
                                 1995         1996         1997          1998      1999        2000          2001


                               Weighted-average interest rate on credit outstanding          Ave cash rate          Ave margin



                  Figure 7: The interest margin on small business loans has been declining46



                  45
                        Source: Reserve Bank of Australia data,2001
                  46
                        RBA Bulletin: Bank fees in Australia July 2001

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          k p mg Consulting                                                    Small Business Banking in Australia
                                                                                                  February 2002


         Assuming that the reductions in net interest margins between 1995 and 2000 are
         reflected entirely in the costs of loans, the reduced cost to small business of a
         $100,000 loan would be $2,160 per annum. If the comparison were with 1997 to
         2000, the savings would be $1,400. This could be combined with savings on fees
         on a $100,000 overdraft over the same period to produce savings of $1,620.47


7.3.2    Movements in bank fees

         At the same time as net interest margins have been declining, banks have increased
         the proportion of non-interest income earned from fees for banking services.

         Fees paid by business are growing at a slower rate than those for households.

         But, fees paid by small business have grown more slowly than those from large
         businesses in recent years, partly reflecting an overall decline in small business loan
         charges.

         Fees on business deposits as a proportion of business deposits have increased,
         while fees on business credit facilities as a proportion of credit outstanding have
         declined.

         Table 7 shows that in recent years the reduction in fees on business credit more
         than offsets this increase in fees on business deposits.



                                                        $ Million

                                                          1998                 1999                  2000
        Fees on business credit                        $ 1,784.00           $ 1,941.00           $ 2,093.00
        Business credit outstanding                    $ 174,902            $ 196,061             $ 215,773
        Fees / Credit                                    1.02%                 0.99%                0.97%
        Hold fees /credit at 1998 level                 $ 1,784             $ 1,999.82           $ 2,200.89
        Benefit                                                               $ 58.82              $ 107.89


        Fees on business deposits                       $ 256.00             $ 312.00              $ 386.00
        Business deposits                               $ 48,302             $ 53,793              $ 59,385
        Fee / deposits                                   0.53%                 0.58%                0.65%
        Hold fees /deposits at 1998 level               $ 256.00             $ 285.10              $ 314.74
        Cost                                                                 ($ 26.90)            ($ 71.26)


        Net benefit                                                           $ 31.92               $36.63

         Table 7: Reduction of fees on business loans vs. increase in fees on business
         deposits.48

         47
              RBA: Bulletin on Small Business Fees 2001.
         48
              Due to RBA data limitations this data includes large and small business.

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      k p mg Consulting                                         Small Business Banking in Australia
                                                                                   February 2002


      However, when comparing the information in Section 7.3.1 with that in Table 7
      above, at an aggregate level the reduction in interest margins has significantly
      outweighed the rise in fees.

      Over the same time frame, bank interest income has grown more slowly than bank
      assets as a result of falling interest margins.

      The RBA has reported that from 1997 to 2000, the total fee income for banks as a
      percentage of assets has increased by less than 0.1 of a percentage point, while
      there has been a decline of 0.75% in the interest spread.


7.4   Summary
      There is a wide diversity of pricing among the big four banks for the various
      business transaction accounts they provide.

      This factor, and the possibility of being able to negotiate fees, should encourage
      small businesses to shop around for the best deal.

      But, the published prices do not seem to be related to the market share of small
      business – that is, those with potentially lower fees do not necessarily have the
      highest market share.

      There are other factors at play, and it would require more in-depth surveys of banks
      and small business to determine why.

      Notwithstanding any limitations on international comparisons, it seems possible to
      draw the conclusion that the small businesses in Australia have a lower cost
      structure for their banking transactions than other major economies surveyed.

      In the case of debt finance, small business has benefited from lower net interest
      margins from 1995 – a decrease of 2.16 percentage points.

      Likewise, the establishment fees for term loans, and the service fees for overdrafts
      have also reduced over the same period.

      And, although service fees for term loans have increased, the reductions referred to
      above have more than outweighed any fee increases.

      Taking the case of an overdraft of $100,000, and incorporating the movements in
      prices above, the cost of debt financing for small businesses has decreased by 17%
      from 1997 to 2000.

      In the case of small businesses, the RBA has concluded that reductions in net
      interest margins of banks in recent years have significantly exceeded the increases
      in banks‟ fee income. Once again, using the example of a $100,000 overdraft, the
      savings on establishment and line fees in 2000 relative to 1997 is $220.

      Furthermore, in the aggregate, for business, the decline in fees charged by banks
      on loans offsets the increase in fees charged on deposits by $36 million from 1998
      to 2000.




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                                                                             February 2002


Small businesses as a whole would seem to be significantly better off. But, as the
RBA cautions, these movements have not made all customers better off. “The
extent to which individual customers are better or worse off will depend on many
factors including the number and type of transactions they typically undertake and
whether or not they have loans as well as deposits”.49




49
     RBA Bulletin: Bank fees in Australia July 2001

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        k p mg Consulting                                              Small Business Banking in Australia
                                                                                          February 2002


8       Small business banking behaviour
        Recent information about the banking behaviour of small business in Australia is
        limited. Useful information is available from the following studies –
             Yellow Pages Small Business Index Special Reports:
              -       Attitude to Banks and Other Financial Institutions, November 1999,
              -       Finance and Banking Issues, September 1995; and
             Greenwich Associates – Unpublished 2000 data on small business banking
              trends.


8.1.1   Institutional preferences

        The Yellow Pages Small Business Index50 notes the preference of small business in
        Australia is to bank with the „Big Four‟ banks.

        Furthermore, Greenwich Associates51 surveys show that small businesses in
        Australia prefer to use “in-person” channels for both purchasing products and
        resolving errors.

        And, we have already pointed out the essential nature of „local‟ facilities for small
        businesses which handle cash and cheques.

        Section 6.6.2 discusses the impact of the more numerous „local‟ branch facilities
        provided by major and regional banks, notwithstanding their recent branch closures.
        This is a key reason for small businesses to prefer banks as suppliers.


8.1.2   The propensity to switch

        Sixteen percent (16%) of the small businesses surveyed by Yellow Pages said that
        they had changed financial institution in the past two years.

        Businesses seeking significant growth, and the largest businesses (those employing
        10-19 employees) were more likely to have changed financial institution (23% and
        22% respectively).
             Among those small businesses changing financial institution, 61% changed to
              one of the major banks.
             Almost 40% of those small businesses that switched move to non-bank financial
              institutions. In fact, Greenwich Associates data has found that small business
              has increased its use of non-bank financial institutions for cheque accounts,
              cash management accounts, term deposits, overdrafts, long term loans,
              mortgages secured by personal assets and standby letters of credit.
             The main reasons given by small businesses for changing were “better service”
              (47%) and “less/lower fees” (32%).




        50
           Telstra Corporation, 1999, Yellow Pages Australia Small Business Index. Attitudes to Banks and
        Other Financial Institutions, November 1999.
        51
             Op cit

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        k p mg Consulting                                          Small Business Banking in Australia
                                                                                      February 2002


        In Section 6.6, we also discussed some reasons why there may be a reluctance to
        switch financial services providers, and in particular to switch away from banks.

        These included the more convenient location of „local‟ facilities, and the core
        competency of credit risk management which banks have built up over many years
        history with small businesses thus allowing them more effectively to tailor offerings
        to the needs of this sector.

        Furthermore, the perceptions of the banks‟ brands are likely to be strong and
        favourable; and they are able to offer a „full service‟

        It has also been suggested by the RBA that small businesses may be reluctant to
        switch provider due to the cost of State imposed Stamp Duties charged on financial
        products.

        Finally, Cruickshank reported that this low propensity of small business to switch is
        common across all of the countries studied by his Review.

        He went on to say that it mattered more in the UK because small business there
        tends to focus on a single banking relationship rather than diversifying across two or
        more competing providers.


8.1.3   Use of more than one provider

        Greenwich Associates data52 showed that in June 1993, 83% of small businesses
        used only one bank and 14% used 2 banks.

        By December 2000, the number of businesses using one bank had fallen to 72%
        and those using 2 banks had risen to 21%, while 8% were using 3 banks.

        The probable reason for moving to multiple providers is the introduction of a variety
        of specialist product providers. Small businesses are more able to use the provider
        that is most appropriate to their needs for different products from time to time. For
        example, small businesses may go to a specialist provider for leasing products.


8.1.4   The increasing use of electronic channels to access current accounts

        In common with banking trends generally, the range of banking channels for small
        business is widening to include:
            Branches and „local‟ facilities for face-to-face services
            ATM
            Internet
            Phone

        As referred to above, research by Greenwich Associates in Australia has shown that
        small businesses prefer over-the-counter banking to other channels, and this trend
        has also been found in UK studies (Cruickshank53, KPMG Consulting54).


        52
           Greenwich Associates (unpublished data)
        53
           op cit
        54
           op cit

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        k p mg Consulting                                                Small Business Banking in Australia
                                                                                            February 2002


        However, more small businesses are starting to do their banking via electronic
        channels such as the Internet.

        According to a June 2001 Report from the National Office for the Information
        Economy (NOIE), in the period from June 1998 to June 2000, Internet access by
        small businesses increased by 105% (from 28% to 57.5%).

        The Report also indicated that the most popular online activity for Australian
        businesses is banking, with 37% of small businesses using the Internet for banking
        in 1999-2000.

        In addition, another report on Internet banking55 shows that on average, the number
        of small business customers that registered for Internet banking at the major
        Australian banks grew by 19% a quarter between June 2000 and September 2001.

        This study also shows that the growth in Internet banking registrations for small
        business between June to December 2000 was greater for the regional/minor banks
        than the major banks (35% and 26% respectively).

        Finally, Greenwich Associates data shows that 80% of small businesses use
        electronic banking – but not fully (i.e. they use other channels as well).


8.1.5   The use of equity capital

        According to the Yellow Pages Small Business survey, in Australia, 51% of firms
        with high growth aspirations felt that they were constrained by lack of capital, and
        the main impact of this was the inability to grow or expand.

        Ironically, one of the reasons contributing to this lack of capital was that around one
        in six were not willing to “seek equity finance by sharing ownership”.

        In fact, surprisingly, the ambitious, entrepreneurial high growth oriented firms
        appeared to be more resistant than average to equity finance.56


8.2     Summary
        Based on these Australian and international studies, a few general conclusions can
        be drawn about the banking behaviour of small business.

        Small businesses tend to prefer the „big four‟ banks.

        They tend to trust them, and believe that the big providers have the conveniently
        located „local‟ facilities essential for small businesses (especially those handling
        cash and cheques). They also consider that the large banks have the expertise they
        need.

        However, there is a slowly developing trend away from the „big four‟ towards
        regional banks and non-bank financial institutions.




        55
             MISC Special SME analysis (unpublished data)
        56
             Yellow Pages Small Business Index: Special Report on Banking & Finance Issues, September 1995

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k p mg Consulting                                         Small Business Banking in Australia
                                                                             February 2002


Once they have chosen a product, small businesses don‟t generally switch between
products of different providers. If they do, it is usually because of poor service or
high costs – and then it is generally only larger small businesses which change.

And, when small businesses wish to buy additional financial services, they are most
likely to purchase from their existing provider – although there is a slow trend
towards having more than one supplier.

Small businesses tend to utilise bank branches for the majority of their banking
needs, and while predominantly cash-based small businesses will continue to rely
on this channel for deposits, more small businesses are moving to online based
banking services, and at a fairly rapid rate.

But, the predominant practice seems to be to use multiple channels – electronic
channels are complementary to face-to-face channels.

There seems to be some reluctance to use equity capital because of the
requirement to share ownership of the business and the perceived possibility of
losing control. Equity capital seems to be most in demand by rapidly growing
businesses operating in highly attractive areas to investors seeking high returns.




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      k p mg Consulting                                         Small Business Banking in Australia
                                                                                   February 2002


9     Agribusiness
      In recent years, the Agribusiness sector in Australia has emerged as of strong
      importance to the Australian economy. It has seen some significant developments in
      the provision of banking and associated services.
      While most main financial services providers (banks, credit unions, building societies
      etc) now offer services for this sector, there are an increasing number of niche
      suppliers are emerging.


9.1   Farm Management Deposit Scheme (FMD)
      The Farm Management Deposit Scheme provides farmers with an effective tax
      linked savings mechanism to allow them to set aside pre-tax income from the good
      years to help them better manage their business during the more difficult years,
      thereby smoothing any erratic income flows. For example:




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      k p mg Consulting                                          Small Business Banking in Australia
                                                                                    February 2002




      There are 25 providers of this product in Australia:
                          Adelaide Bank Limited            ANZ
      Banks
                          BankWest                         Bendigo Bank
                          CBA                              Elders Rural Bank
                          NAB                              Primary Industry Bank of Australia
                          St George Bank / Bank SA         Suncorp Metway Bank
                          Westpac

                          Bananacoast Community
      Credit Unions                                        Calare Credit Union
                          Credit Union
                          Nacos Credit Union Ltd           New England Credit Union
                          Police Credit Union              QLD Country Credit Union Ltd
                          St Mary‟s Cooperative            Sth East Community Credit
                          Credit Union                     Society Ltd

                          WAW Credit Union                 Yarrawonga Credit Union
                          Armidale Building Society Ltd Mackay Permanent Building Society
      Building
      Societies           Pioneer Permanent Building
                          Society
                          Rural Finance Corporation        Bidgee Finance Limited
      Finance
      companies

      Table 8: Providers of Farm Management Deposits


9.2   AWB Ltd
      AWB Limited is Australia's major national grain marketing organisation and is one of
      the world's largest wheat management and marketing companies.

      AWB Ltd and the Adelaide Bank have formed a joint venture to provide a cash
      management account for grain growers.

      The AWB GrainPay is a cash management account, administered by Adelaide
      Bank, and specifically designed to leverage grain payments by earning an attractive
      interest rate.

      An added feature of AWB GrainPay is providing assistance with the management of
      the Goods and Services Tax through a separate GST Accumulation Account.

      Payments made by AWB Ltd for grain include GST, and the liability to pay GST to
      the Australian Taxation Office rests with the grower.

      AWB Ltd cannot make the GST payment but has designed AWB GrainPay to offer a
      simple way for growers to capture and accumulate the GST component of AWB
      grain payments and make periodic tax payments via a GST Accumulation Account.


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      k p mg Consulting                                            Small Business Banking in Australia
                                                                                      February 2002


      The GST Accumulation Account helps growers keep track of GST receipts and
      remittances for grain payments. The GST component of a grain payment can be
      automatically credited to a GST Accumulation Account for convenience and easy
      record keeping, assisting in the management of periodic remittances to the
      Australian Taxation Office.


9.3   Australian Rural-Agricultural Finance
      Australian Rural-Agricultural Finance (ARAF Capital Funding), operates out of
      Armidale, NSW, and offers the following debt finance products to the rural sector:




      ARAF also offer hobby farm / non-commercial funding. This is predominantly for
      individuals who have an external income to their (potential) property and looking to
      use this cash flow to purchase a small acreage property for a lifestyle rather than
      income source.


9.4   Registered pastoral finance companies
      Pastoral finance companies have been in existence since the mid 1980‟s and
      provide short-term finance for farm inputs and livestock.

      Recently, pastoral finance companies have had greater asset growth than any other
      financial institution in Australia.

      In the year to September 2001, pastoral finance companies had a 67.6% increase in
      asset growth, compared with a 9% increase for banks; a 7% decrease for building
      societies; 18.5% increase for money market corporations and a 2% increase for
      general finance companies57.

      Australia has 14 registered pastoral finance companies, predominantly distributed
      through WA and QLD. These companies include:



      57
           RBA data: Total Assets of Financial Institutions 2001

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      k p mg Consulting                                         Small Business Banking in Australia
                                                                                   February 2002


          Queensland                               John Deere Credit Limited
                                                   Primac Elders Limited
                                                   Primac Limited
                                                   Primac Pastoral Co Pty Ltd
                                                   Southern Wool Services (Goulburn) Pty
                                                    Ltd
          Western Australia                        Dalgety Limited
                                                   Elders Burnett Moore W.A. Pty Ltd
                                                   Wesfarmers Landmark
                                                   Wesfarmers Limited
                                                   Westralian Farmers Co-operative Limited
          Victoria                                 Arcadian Wool Brokers Limited
                                                   AWB Finance Limited
                                                   Elders Limited
          Tasmania                                 Elders Real Estate Franchise Pty Limited

      Table 9: Pastoral Finance Companies by State


9.5   Rural Finance Corporation of Victoria
      Rural Finance is Victoria's specialist rural leader, providing financial products and
      services to Victorian primary producers and rural industries, and is one of the few
      remaining government-owned rural finance businesses.

      Rural Finance has a loan portfolio of $497.4 million (including provisions) and a
      client base of approximately 15% of Victoria‟s commercial farmers, and a number of
      rural businesses.

      Financial products offered include:
         Farm Business Loans – including term loans, leasing, working capital and
          redraw facilities
         Business Loans – providing finance to non-farm regional businesses or
          metropolitan businesses involved in the processing of primary produce for local
          and export markets.
         Young farmers finance scheme – providing low-interest loan assistance to young
          farmers for purchasing land, stock and equipment to start or progress in farming.
         Investment products – Farm Management Deposits.




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      k p mg Consulting                                         Small Business Banking in Australia
                                                                                   February 2002




9.6   Summary
      Agribusiness is a specialist sector of small business in Australia. It is of substantial
      importance to the Australian economy.

      There are a significant number of providers of specialist financial and banking
      services specifically tailored to agribusiness, and many of these are demonstrating
      strong asset growth in recent years. This indicates that demand is tending to be
      satisfied.

      The extension of „local‟ financial service facilities discussed in Section 6.3 will also
      be of increasing benefit to rurally based agribusiness.




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     k p mg Consulting                                         Small Business Banking in Australia
                                                                                  February 2002


10   Conclusions
     As a basis for our research we adopted the following key determinants of effective
     banking and financial services to small business –
        Is there a reasonable number of suppliers of banking and financial services to
         small business in the Australian market?
        Are there new providers of banking and financial services entering the small
         business market?
        Are the prices charged to small businesses for banking and financial services
         reasonable and competitive?
        Given the importance of external finance (overdraft, loans, equity etc) to small
         business, is such finance available, and is the cost reasonable?
        Are the suppliers of banking and financial services to small businesses
         introducing new products which are keeping pace with developments in the
         sector and the economy generally?

     We have been able to conclude –

     Number of suppliers
        There are 57 providers of 720 debt financial products and services and 44
         providers of 72 transaction accounts for small businesses in Australia. These
         include credit unions, building societies, mortgage originators, finance
         companies etc;
        Although there are increasing numbers of providers of equity capital to small
         businesses, other than special category businesses (faster growth ambitions or
         highly attractive operating focus) small business owners are reluctant to take up
         such capital for fear of losing control or ownership of their business;

     New providers
        And, the provision of such services to small business has extended significantly
         beyond the banking sector;
        There are also a number of specialist providers of services to agribusiness which
         support the offerings of banks to this sector;
        But, notwithstanding the emergence of other providers, and a small movement to
         non-bank financial institutions, small businesses tend to remain loyal to the „big
         four‟ banks which have a dominant market share of between 63% and 90%
         depending on the State;
        And, regional banks are increasing their market share of small business at the
         expense of other banks and non-bank financial institutions;
        There are many factors which influence this preference to stay with banks
         including their more numerous, and hence more convenient „local‟ facilities
         (branch closures notwithstanding). There are around 5,000 bank branches in
         Australia (more than 3,500 for the major banks), compared with around 120
         branches, agencies and service outlets for the largest four credit unions;
        Other factors include the longer history of banks with small business and hence
         their better ability to manage credit risk for the high risk small business sector;
         the perception of the bank brands; and the costs of switching;



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                                                                             February 2002


   There are also a number of initiatives under way where other organisations are
    working with banks and financial institutions to extend the number of „local‟
    facilities (eg GiroPost with Australia Post);
   And, small businesses are moving quickly to alternative channels, with Internet
    access for small business increasing by 105% from 1998 to 2000, and up to 80%
    of small businesses carrying out some form of banking over this channel;

Prices to small business
   Prices for transaction accounts vary widely across providers and between
    channels;
   This factor and the potential to negotiate fees should provide some incentive for
    small business to shop around for the best deal;
   But, the market share of banks and other providers, does not seem to be related
    to the prices offered, and this is probably due to the factors discussed above;
   Small business in Australia seems to have low prices for banking transactions
    when compared with a number of other countries;
   And, over recent times small businesses have benefited from reduced interest
    rate margins, lower establishment fees on term loans and overdrafts, and lower
    service fees on overdrafts;
   These have significantly outweighed fee increases on deposits and service fee
    increases on term loans;
   For example, taking all of these movements into account, the cost of debt
    financing of a $100,000 overdraft has decreased on average by around 17%
    from 1997 to 2000;
   In the aggregate, for business, the decline in fees charged by banks on loans
    offsets the increase in fees charged on deposits by $36 million from 1998 to
    2000;
   But, these benefits may not have been felt by all small businesses. The impacts
    on individual businesses depend on a number of variables including the type and
    number of transactions, and whether they have loans as well as deposits;

Availability of debt finance
   There does not appear to be a difficulty for small business to access debt
    finance in Australia. In the year to September 2001, the banks advanced $25
    billion in credit to business – around 38% of the total credit outstanding of $66
    billion.

Introduction of new products and services
   On a global assessment, Australia has been rated as being moderately
    innovative in the area of small business banking – comparable with the UK and
    Canada, behind the US, but ahead of France and Germany;
   In addition to the wide range of products shown in Tables 1 and 2 in Section 5.5,
    many financial institutions are entering other arrangements (agencies, franchises
    – eg GiroPost with Australia Post) with third parties to make available „local‟
    facilities (which are so vital to small business). While these were initially targeted
    at personal customers, increasingly they are being piloted for small business.




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     k p mg Consulting                                         Small Business Banking in Australia
                                                                                  February 2002


11   Bibliography
     Australian Bureau of Statistics, 2000, Characteristics of Small Business.

     Australian Bureau of Statistics, 1999, Small Business In Australia 1999.

     Australian Productivity Commission, 2000, Business Failure and Change: An
     Australian Perspective. Staff Research Paper.

     Bank of England, 2001, Quarterly Report on Small Business Statistics, July 2001.

     British Bankers Association, 2001, Banks and Businesses: Working Together When
     you Borrow. A Statement of Principles.

     Centre for Australian Financial Institutions, 1998, Banking in the Bush: the Transition
     in Financial Services.

     Cruickshank, D., 2000, Competition in UK Banking. A Report to the Chancellor of
     the Exchequer.

     Greenwich Associates, 2001, Small Business Banking Trends. Unpublished Data.

     KPMG Consulting UK, 2001, Research Report: The Last Real Relationship?
     Understanding the Future of Small Business Banking.

     Market Intelligence Strategy Centre, 2001, Special SME Analysis, prepared for
     Australian Bankers Association.

     National Office for the Information Economy, 2001, The Current State of Play

     New South Wales Treasury, 2001, Interstate Comparison of Taxes 2001 – 2002:
     Office of Financial Management Research and Information Paper.

     Pacific Access Pty Ltd, 1995, Yellow Pages Australia Small Business Index. A
     Special Report on Finance and Banking Issues September 1995.

     Reserve Bank of Australia Bulletin, 2001, Bank Fees in Australia.

     Reserve Bank of Australia (Gizycki, M & Lowe, P), 2000, The Australian Financial
     System in the 1990s.

     Reserve Bank of Australia, 1999, Notes on Bank Fees on Small Businesses
     (prepared for the information of members of the House of Representatives Standing
     Committee on Economics, Finance and Public Administration).

     Reserve Bank of Australia Bulletin, 1997, Small Business Lending.

     Reserve Bank of Australia Bulletin, 1997, Recent Developments in Small Business
     Finance.




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       k p mg Consulting                                         Small Business Banking in Australia
                                                                                    February 2002


       Reserve Bank of Australia (Edey, M & Gray, B), 1996, The Evolving Structure of the
       Australian Financial System.

       Sydney Morning Herald, 30/11/2001:p 3, Big Four bank on a good name.

       Telstra Corporation, 1999, Yellow Pages Australia Small Business Index. Attitudes
       to Banks and Other Financial Institutions, November 1999.

       The Age, 30/11/2001:P 4, Branded for success: Telstra leads the fame game with a
       $9.4b price tag.

       TowerGroup, 2001, Retail Versus Corporate Deposit Account Processing: Do
       Differing Requirements Call For Different Solutions?

       TowerGroup, 2001, Strategy Primer for Commercial Banks Servicing Small
       Businesses in the Age of the Internet.

       US Small Business Authority, Small Business Finance in Rural and Urban Regions.

       United Kingdom Financial Services Authority, 2000, Response by the Financial
       Services Authority to the Cruickshank Report on Competition in UK Banking.

       United Kingdom Financial Services Authority, 2000, The FSA’s Response to the
       Cruickshank Report’s Recommendations on the Use of Disclosure.

       United Kingdom Competition Commission, 2001, Supply of Banking Services by
       Clearing Banks to Small and Medium Enterprises (SMEs) – Statement of
       Hypothetical Remedies.




11.1   For further details
       Please contact KPMG Consulting / Nolan Norton Institute:

       45 Clarence St
       Sydney NSW 2000
       Australia
       Tel: +61 2 9335 7034
       Fax: +61 2 9335 7078




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  k p mg Consulting                                           Small Business Banking in Australia
                                                                                 February 2002




  APPENDIX A – PROVIDERS OF BANKING PRODUCTS TO SMALL BUSINESS

           Name of Bank                                     What they offer
                                          Business Cheque Account
Westpac
                                           -   Non-interest bearing
                                           -   16 free transactions per month
                                          Business Cheque Plus
                                           -   Interest bearing on balances over $2,000
                                           -   40 free transactions per month
                                          Business Cash Management Account
                                           -   Interest bearing on balances over $5,000
                                           -   12 free transactions per month
                                          Business Cash Management Investor Option
                                           -   Interest bearing on balances over $5,000
                                           -   No free transactions
                                          Tax Management Account
                                           -   Interest bearing on balances over $5,000
                                           -   2 free electronic transactions per month
                                           -   Unlimited deposits & withdrawals
                                          Business Management Account
NAB
                                           -   Interest bearing on balances over $5,000
                                           -   No free transactions
                                          Business Cheque Account
                                           -   Non-interest bearing account
                                           -   No free transactions
                                          Premium Business Account
CBA
                                           -   Interest bearing on balances over $5,000
                                           -   40 free transactions per month
                                          Standard Cheque Account
                                           -   Non-interest bearing account
                                           -   No free transactions




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                                                                                         February 2002



                                                 Business Classic Cheque Account
ANZ
                                                  -   Non-interest bearing account
                                                  -   20 free collections58 per month
                                                  -   30 free transactions59 per month
                                                 Business Extra Cheque Account
                                                  -   Interest bearing on balances over $5,000
                                                  -   20 free collections per month
                                                  -   20 free transactions per month
                                                 Business Cheque Account Plus
St George/Bank of South Australia
                                                  -   Interest bearing account
                                                  -   No free transactions
                                                 Business Cheque Account
                                                  -   Suits high transaction volume customers
                                                  -   Interest bearing with interest paid 6 monthly
                                                 Portfolio Cash Management Account
                                                  -   Interest bearing account
                                                  -   Minimum deposits of $5,000
                                                 Business Cheque Account
Adelaide Bank
                                                  -   Interest bearing account
                                                  -   $20 worth of free transactions per month
                                                 Business Cash Management
Bendigo Bank
                                                  -   Interest bearing account
                                                  -   Some free transactions per month
                                                  -   Minimum $5,000 balance to open account
                                                 Business Solutions Account
                                                  -   Interest bearing account
                                                  -   30 free transactions per month
                                                 Business Cheque Account
                                                  -   Suits low volume-non-cheque users
                                                  -   Interest bearing account
                                                  -   Some free transactions per month




  58
       A collection is a cheque or merchant summary slip deposited in your account
  59
       A transaction is any deposit, or withdrawal or transfer.

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                                                                                  February 2002



                                   Business Cheque Account
Suncorp Metway
                                    -   Interest bearing account
                                    -   20 free transactions per month
                                   Business Management Account
                                    -   Interest bearing on balances over $5,000
                                    -   5 free transactions per month
                                   Business Plus Account
BankWest
                                    -   Interest bearing on balances over $5,000
                                    -   No free transactions
                                   Standard Business Cheque Account
                                    -   Sweep facility to automatically transfer funds to
                                        and from a cash management account.
                                   Commercial      Interest     Bearing     Cheque       Account
Bank of Queensland
                                    (CIBCA)
                                    -   Interest bearing on balances over $20,000
                                    -   No free transactions




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Description: Small Business Banking document sample