Christian Schwarz is a pro in financial transactions.
He leads MDC Investment, his family’s asset management firm, which holds shares in chemical company Zschimmer & Schwarz, another family business. Referring to small and midsized businesses, Mr. Schwarz said it is clear that “some classic SMEs which aren’t conversant in financial subjects are not well served by their banks.” His conclusion, based on his experience: “Banks should know the needs of their customers better, should listen and should get industry expertise,” he said. “Instead, financial institutions standardize; they check off boxes rather than develop individual solutions,” said Mr. Schwarz who– as regional chairman of an association representing family businesses – knows what he’s talking about.
The German Management Research Association (DGMF) also came to this conclusion in a survey of 642 companies, the results of which have been submitted to Handelsblatt. The conclusion: Companies don’t have great confidence in their financial institutions. And that doesn’t only have to do with the financial crisis. Poor financial counseling as well as overpriced financial products are also to blame. “German banks are confronted with a grave confidence crisis with SMEs that massively threatens their business base,” said Christoph Wamser, the DGMF chairman and co-author of the study.
“With the financial crisis, it became clear to the companies: The bank advisor is not an independent advisor, but rather, ultimately sells financial products.”
That is an indictment given the fact that banks are scrambling for business with SMEs. The competition for corporate clients is fierce. Next to Deutsche Bank and Commerzbank, the publicly own state banks, HSBC Trinkaus as well as some foreign institutions such as BNP Paribas are also fighting for the business of large SMEs. But even with small businesses, it has no longer just savings and cooperative banks that are serving this niche – the competition is increasing here, too.
Despite all efforts, only about 20 percent of SMEs have great confidence in their banks, according to the DGMF poll, in which companies with sales of €1 million to €2 billion participated. Most of those polled described their confidence in banks as “average,” with cooperative banks and savings banks outperforming commercial and regional banks.
More than 72 percent of SMEs said banks were not proactive enough.
“SMEs would like that banks approach them ahead of time – a year in advance for example — before loans are set to expire,” said Mr. Wamser, who also is an economics professor at Bonn-Rhein-Sieg University. Moreover, 38 percent of companies surveyed said financial institutions don’t offer them the right financial products. And 72 percent considered most of what was offered to be overpriced.
SMEs are taking a more sober view of banks these days, said Britta Becker, a partner at the E&Y consulting firm. “With the financial crisis, it became clear to the companies: The bank advisor is not an independent advisor, but rather, ultimately sells financial products.”
The financial institutions take issue with the criticism. The German Banking Association, which represents private banks, pointed out that banks and savings banks have a great interest in a long-term, stable relationship with their corporate clients. Moreover, the availability of credit to SMEs, according to the study, is relatively inexpensive. “In this respect we cannot completely understand the interpretation from DGMF,” the banking association said in a statement.
The German Savings Bank Association acknowledged that trust in the industry had been damaged by the financial crisis, but said it did not consider the SME poll to be representative.
During the financial crisis, foreign financial institutions in particular cut back on lending to SMEs. The companies have responded by improving their equity ratios – which measures the proportion of a company’s equity devoted to financing ongoing business. The equity ratio has the highest priority in financing, according to the E&Y study. Three quarters of SMEs also finance their operations through their own cash flows. Some even do without bank loans entirely, such as the retail business group Tengelmann.
However, banks aren’t entirely at fault, according to Mr. Wamser: “Many SMEs must also take a look in the mirror and admit that they have tended to care too little, or too late, about their own financial needs.’’