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An Examination of the Factors Associated with Bank Switching in the U.K. Small Firm Sector

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  • Howorth, Carole
  • Peel, Michael J
  • Wilson, Nicholas

Abstract

Previous research has consistently shown that a large number of firms are sufficiently dissatisfied with their bank relationship to have considered switching to an alternative bank. In practice, however, the number of firms which actually switch banks is relatively low. This paper examines empirical evidence from a postal survey of small firms in order to investigate this paradox. Binomial and multinomial logistic regression is used to identify the characteristics which discriminate between a group of firms considering switching banks and two other groups, namely those which had switched banks in the previous three years and those which had not switched banks and were not considering doing so. The paper tests the hypothesis that some small firms may be "informationally captured", in that they are tied into their current bank relationship due to difficulties in conveying accurate information about their performance. The results provide some evidence in support of the hypothesis in that rapidly changing information, particularly changing technology, was a characteristic associated with firms which were considering switching but had not switched. However, there was no significant evidence to support the hypothesis that superior performing firms are more likely to be "informationally captured"; growth and perceived business success were both associated with firms which switched banks. There was strong evidence that the main drivers of the decision to switch or consider switching banks were difficulties obtaining finance and dissatisfaction with the service provided. The results also showed that firms which were considering switching banks tended to use more alternative (non-banking) sources of finance. It is concluded that some firms will resolve difficulties obtaining finance by switching banks, whereas others will use alternative sources of finance depending on the balance between the benefits of switching, such as increased finance, and switching costs including information provision. Copyright 2003 by Kluwer Academic Publishers

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  • Howorth, Carole & Peel, Michael J & Wilson, Nicholas, 2003. "An Examination of the Factors Associated with Bank Switching in the U.K. Small Firm Sector," Small Business Economics, Springer, vol. 20(4), pages 305-317, June.
    • Handle: RePEc:kap:sbusec:v:20:y:2003:i:4:p:305-17
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    Citations

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    Cited by:

    1. Moro, Andrea & Belghitar, Yacine & Mateus, Cesario, 2021. "National culture and small firms' use of trade credit: Evidence from Europe," Global Finance Journal, Elsevier, vol. 49(C).
    2. Ferrando, Annalisa & Moro, Andrea & Maresch, Daniela, 2015. "Creditor protection, judicial enforcement and credit access," Working Paper Series 1829, European Central Bank.
    3. Ginés Hernández-Cánovas & Pedro Martínez-Solano, 2010. "Relationship lending and SME financing in the continental European bank-based system," Small Business Economics, Springer, vol. 34(4), pages 465-482, May.
    4. Manpreet Kaur & Kanwaljeet Singh & Sarita Arora, 2023. "Are SMEs relationship seekers or price watchers? Target marketing implications for banks," Journal of Financial Services Marketing, Palgrave Macmillan, vol. 28(3), pages 615-625, September.
    5. Georgiou, George & Roberts, Clare B., 2004. "Corporate lobbying in the UK: an analysis of attitudes towards the ASB's 1995 deferred taxation proposals," The British Accounting Review, Elsevier, vol. 36(4), pages 441-453.
    6. Davide Arnaudo & Giacinto Micucci & Massimiliano Rigon & Paola Rossi, 2016. "Should I stay or should I go? Firms’ mobility across banks in the aftermath of financial turmoil," Temi di discussione (Economic working papers) 1086, Bank of Italy, Economic Research and International Relations Area.
    7. Carole Howorth & Beat Reber, 2003. "Habitual late payment of trade credit: an empirical examination of UK small firms," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 24(6-7), pages 471-482.
    8. J.-P. Niinimäki, 2022. "Relationship Lending and Switching Costs under Asymmetric Information about Bank Types," Journal of Financial Services Research, Springer;Western Finance Association, vol. 61(1), pages 111-149, February.
    9. Carole Howorth & Andrea Moro, 2012. "Trustworthiness and interest rates: an empirical study of Italian SMEs," Small Business Economics, Springer, vol. 39(1), pages 161-177, July.
    10. Celine Gondat-Larralde & Frank Strobel, 2004. "Switching Mortgages: a real options perspective," Money Macro and Finance (MMF) Research Group Conference 2004 82, Money Macro and Finance Research Group.
    11. Fulbag Singh & Manpreet Kaur, 2015. "Why Exporting SMEs Switch Banks?," Global Business Review, International Management Institute, vol. 16(4), pages 652-664, August.
    12. Tang, Ying & Moro, Andrea, 2020. "Trade credit in China: Exploring the link between short term debt and payables," Pacific-Basin Finance Journal, Elsevier, vol. 59(C).
    13. Antti Fredriksson & Daniela Maresch & Andrea Moro, 2017. "Much ado about nothing? Interest and non-interest products and services: Their impact on small banks’ margins," Cogent Economics & Finance, Taylor & Francis Journals, vol. 5(1), pages 1339771-133, January.
    14. Moro, Andrea & Fink, Matthias, 2013. "Loan managers’ trust and credit access for SMEs," Journal of Banking & Finance, Elsevier, vol. 37(3), pages 927-936.
    15. Carole Howorth & Andrea Moro, 2006. "Trust within Entrepreneur Bank Relationships: Insights from Italy," Entrepreneurship Theory and Practice, , vol. 30(4), pages 495-517, July.
    16. Eriksson, Kent & Fjeldstad, Øystein & Jonsson, Sara, 2017. "Transaction services and SME internationalization: The effect of home and host country bank relationships on international investment and growth," International Business Review, Elsevier, vol. 26(1), pages 130-144.
    17. Fredriksson, Antti & Moro, Andrea, 2014. "Bank–SMEs relationships and banks’ risk-adjusted profitability," Journal of Banking & Finance, Elsevier, vol. 41(C), pages 67-77.

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