Hope Rises Amid Lingering Trust Issues Between US SMEs and Banks

New research from Greenwich Associates suggests the steady deterioration of trust in relationships between US small and mid-sized enterprises (SMEs) and their banks that started during the credit crisis might have reached a bottom.

The results of an October Greenwich Market Pulse of 464 SMEs reveal hopeful signs that an inflection point could be near for some relationships between US companies and their banks. Simply put: The rate of decline in trust is levelling off. Approximately 20% of small businesses say their level of trust in their banks has actually increased over the past six months – up from 17% reporting improved levels of trust over the same period in 4Q10. Among mid-sized companies, the share reporting diminishing levels of trust has been decreasing steadily since the first quarter of 2010.

“After a difficult period beginning with the onset of the global credit crisis, we now see fewer companies reporting declines in trust levels, a growing share of companies reporting stable levels of trust and an encouraging number of companies reporting improvement,” said Greenwich Associates consultant Duncan Banfield.

Any positive signs in these metrics will come as welcome news for banks, which are still experiencing business turnover as a result of past trust issues. Approximately 30% of small businesses and a quarter of mid-sized companies surveyed in the Greenwich Associates Market Pulse say they changed the amount of business done with a particular bank because of trust issues.

Companies opting to pull business from a bank because of trust issues are acting decisively: 57% of small businesses that changed the amount of business done with a bank due to trust issues last quarter pulled at least half of their business from that bank, and nearly a quarter of the companies pulled 100%. Among mid-sized companies reacting to trust issues, 36% pulled at least half of their business from the bank in question and nearly one in five moved 100%.

All those numbers are consistent with the behaviour of SMEs seen in 2010. “What we’re seeing is continued fallout from the credit crisis,” said Greenwich Associates consultant Don Raftery. “There is no doubt that banks’ reputations took a hit due to credit disruptions during the crisis. Banks still have the opportunity to repair some of that damage and restore trust levels by making a concerted effort to improve the service they deliver to SMEs.”

Downturn in Economic Outlook

After months of steady improvement, economic sentiment took a downward turn over the past quarter among the rotating panel of SMEs participating in the Greenwich Market Pulse.

The Greenwich Optimism Index for small businesses has been in negative territory since the middle of 2010, meaning that, on net, small businesses expect economic conditions in the US to deteriorate in coming months. However, the index score had been moving in the direction of positive territory for the past three quarters. Over the past three months that trend reversed, and the Index score for Small Businesses dropped even further into the negative range.

A similar reversal among mid-sized companies brought the Greenwich Optimism Index for this segment back into negative territory. After a slow climb lasting three quarters, the index for mid-sized companies finally broke through into the positive range in June 2011, meaning that the number of companies expecting economic improvement exceeded the number predicting economic decline. The reversal in 3Q11 erased that improvement, pushing the Optimism Index down to negative levels last seen in 2009.

“These results reflect a host of uncertainties ranging from the ongoing battle over the US debt ceiling and the European sovereign debt crisis to market volatility and persistently high levels of unemployment,” said Banfield.


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