AWARD REPORT. Small Business

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1 2014 AWARD REPORT Small Business

2 August 2014 SMALL BUSINESS IN THIS REPORT The very specialised and diverse nature of small business operations requires a specialised banking response. We examine how financial institutions are cutting it. The backbone of NZ s economy In June this year, the Ministry of Business, Innovation and Employment released their inaugural Small Business Sector Report providing detailed information on the 459,000 small businesses that make up a large part of the New Zealand economy. Describing them as the backbone of New Zealand s economy, the good news from the report is that things are looking up, with an increasing number of small businesses reporting improving profitability. Other good news is that access to finance, economic growth and ease of doing business all ranked highly. 1. Ninety-seven per cent of enterprises in New Zealand are small businesses and have fewer than 20 employees 2. There are 584,000 people employed in enterprises with fewer than 20 people, making up 30 per cent of the workforce. 3. Small businesses contribute to 28 per cent of New Zealand s GDP. Ministry of Business, Innovation and Employment In addition to economic strength, it appears that lifestyle benefits rate highly for small business owners, with the Small Business Sector Report reporting that wanting a lifestyle change was the main reason for starting a business for approximately 36% of research respondents. A further 22% saw their business as an investment strategy for the future, while 16% wanted to make money from a hobby or interest. The research was garnered from the MYOB Business Monitor survey. When it comes to types of industry, small businesses are spread over a wide and diverse range. Statistics New Zealand advises that some of the more populous industries include: Industry Number of enterprises Rental, hiring and real estate 99,846 Agriculture, forestry and fishing 67,169 Professional, scientific & technical services 49,931 Construction 48,557 Financial & insurance services 28,916 Source: Statistics NZ Business Demography, Feb

3 Addressing your business needs What does small business require from a business banking relationship? CANSTAR s annual assessment of financial institution offerings considers that a good combination of products and institutional features is paramount. These are the specific elements that we look for: Outstanding value credit cards In addition to secured loans, credit cards are also an essential tool of business operation for many. CANSTAR assess the pricing and features of the business credit cards on offer, for both business owners who juggle a debt and those who pay their card in full each month. Outstanding value deposit accounts It s not all about debt: businesses also need somewhere to stash their savings as well as great-value transaction accounts. CANSTAR assess the pricing and features of the products on offer. Highly featured loan products The loan requirements of small businesses will vary - some may require a one-time loan while others require access to a revolving line of credit. So CANSTAR look for the full suite of loan options available, including both residential and commercial term loans and residential and commercial overdraft loans, and assess the features offered on each to identify the products that provide the greatest flexibility In addition to outstanding value products, this award aims to give recognition to the institution that backs up quality products with great service to small businesses. CANSTAR consider the following institutional factors to be an important part of a successful small business/banking relationship. Branch coverage While most banking these days is done electronically there are still important business functions for example cash deposits and product applications - that can only be solved by the presence of a branch. Online banking functionality Small businesses also require excellent online banking functionality for sales, purchases and payroll facility. That includes general mobile banking, internet banking (the secure login) and website (the public, unsecure side of the website) functionality, as well as easily accessible small business-specific tools and information. Relationship manager availability and support services For many time-poor small business owners the human factor is an important feature in a good banking relationship. Education Products and features Institutional factors Small businesses tend to be time-intensive, leaving little time for research. Financial institutions can add a great deal of value to their small business clients by providing online economic and industry insights, analysis and education tools. 2

4 Who offers outstanding value? This year we congratulate Bank of New Zealand (BNZ) on retaining yet again the CANSTAR Best Value New Zealand Small Business Banking Award. BNZ s success was achieved based on its outstanding-value product offering of deposit accounts, the adaptability of its business transaction accounts and its offering of quality credit cards that are adaptable for different business owner needs and usages. Products Loans BNZ s overdraft loan in particular caught the eye of the CANSTAR research team due to its flexibility: it has no fixed term, 24-hour access, is provided via online banking and ATMs, there is no penalty for early lump sum repayments and it is flexible with regards to loan purpose. Cards For business owners who pay their credit card in full each month, BNZ s GlobalPlus Business credit card offers a number of card facilities including unauthorised transaction insurance to protect against employee fraud, free international business travel insurance, flexibility on card limits, fee waivers for spends over $24,000 half-yearly and the ability to earn rewards points and status credits with Airpoints. For business owners who tend to revolve a credit card debt, BNZ offers the Business First Visa Lite credit card, with a low interest rate, a comparatively low annual fee of $60 per card, 55 interest free days, unauthorised transaction insurance and a low minimum monthly repayment. Best Value New Zealand Small Business Banking Award Deposits BNZ s new TotalMoney for Business account has topped the deposit accounts mainly due to its flexibility across all three profiles assessed for the CANSTAR award. It gives users the ability to set aside GST and income/provisional tax, allocate money to pay suppliers and monthly bills and keep specific accounts for specific uses. It also offers a doubled interest rate over the standard on balances over $100,000 and unlimited monthly transactions for a comparatively low monthly fee of $10. Institutional factors Bank of New Zealand has 178 bank branches across New Zealand and the relationship managers are available 72 hours weekly (which is much higher than the market average). BNZ also offers excellent online banking functionality and an impressive range of business education tools. CANSTAR would like to congratulate BNZ on its award win for 2014! 3

5 In addition to banking products and services, BNZ has been busy on the business innovation front this year, also winning a 2014 CANSTAR Innovation Excellence award for PayClip an innovative mobile payment solution that allows business owners to convert their smartphone and/or tablet into a portable till. Available for iphone and most Android smartphones, users clip PayClip onto their mobile device, log in to the PayClip app, enter the amount that needs to be paid and insert the customer s Mastercard or Visa debit or credit card. The customer signs, the signature is verified and the transaction (securely encrypted) is complete. An or text receipt can be sent to the customer and the funds are generally in the business account as early as the next business day. Truly a smart innovation. In light of the win, we spoke to BNZ s head of small business, Harry Ferreira In your view, what Q are some of the key disciplines for small businesses in the fastchanging business environment? Small Businesses A need to work out how to manage their cash flow well. It s about being adequately capitalised and provisioning to meet obligations as they arise. Managing costs is another discipline to focus on. Furthermore, good terms of trade are important to protect your business and ensure there is no impact on your cashflow. Staying relevant in an increasingly competitive environment will mean understanding what it is your customers really want and need and then anticipating, preparing and responding to meet these needs. What are some of the most Q popular online resources that your customers use? We have some great online A resources available to our customers, including the Business Wire. This is a regular newsletter we send our customers, giving them with access to helpful insights into current business trends and opinions as well as articles written by our customers about their businesses. It also gives us the ability to showcase offers which we or our partner organisations have made available to BNZ customers. Some of the more popular insights that our customers make use of are the regular economic reviews, written for us by Tony Alexander. This is an upto-the-minute view of the NZ economy and Tony s predictions for business market trends, as well as housing trends. Our customers find this kind of expert opinion really helpful to their business planning. We feature customer case studies and links to the new initiatives our partners are introducing on our website. Case studies give potential new customers an insight into the resources and networks available to help their business grow with the support of BNZ. In addition to online Q resources, how important is that one on one service from business managers? One on one service that s provided A by our Business Managers is very important as it gives us the opportunity to really understand our customers business wants and needs. It helps us act as a sounding board to provide knowledge and insight into challenges our customers face day in and day out. Through quality conversations we can work with business owners to create the best outcome for sustainable growth. Our role within BNZ Small Business is much more than just providing transactional banking. It s about providing support seven days of the week, access to networks, connections and advice to enable business growth and helping our customers be good with money. 4

6 METHODOLOGY SMALL BUSINESS AWARD METHODOLOGY What is the CANSTAR Small Business Banking Award? CANSTAR Small Business Bank of the Year Award is awarded to the institution that provides the best combination of products across the business banking star ratings profiles, as well as excelling in a range of institutional factors. The award aims to give recognition to the institution that backs up quality products with great service to small businesses. Institutional factors that were considered include: Branch coverage Relationship manager availability Online banking functionality Small Business Banking Award methodology tree Merchant services Other business services & advice Loans 40% Term loans Residential (80%) and Commercial (20%) 40% Overdraft Residential (80%) and Commercial (20%) 60% Products Institution s business banking products 65% Credit cards 20% Deposit accounts 40% Revolver 40% Transactor 60% Online Saver Deposit profile 20% High Transactor Deposit profile 40% Low Transactor Deposit profile 40% Business banking 40% Institutional factors Institution s business banking capabilities 35% Relationship manager and support services 30% Other business services & advice 20% Education 10% 5

7 Institutional factors Institutional factors Weighting Business banking 40% Branch coverage Online banking functionality 25% Payment services 25% Relationship manager and support services 30% Relationship manager coverage 85% Support services 15% Other business services and advice 20% Start ups 10% Risk management 25% Small business packages 30% Equipment finance 25% Disaster relief and support 10% Education 10% Institutional factors Weighting Online banking functionality 25% Transaction history 25% Payroll 25% Payments 15% Security limits 15% Self service 20% Business Loans New Zealand Features component More than 100 individual features of each loan and overdraft is scored for positive traits and awarded a Business Loan Features score. Currently the pricing component of business loans is excluded from the calculations because of the variability in the pricing models used across the industry. The table below highlights the contribution of the various groups of information to award the Business Loan Features score. Business loan feature weights Feature category Term loans Overdrafts Lending terms 30% 25% Security accepted 5% 5% Redraw facility 15% - Relationship bonus 10% - 6

8 Portability 5% 5% Loan purposes availability 10% 10% Repayment capabilities 10% - Split facility 5% - Switching facility 5% - Overdraft terms - * Online security 5% 5% * For the overdraft terms feature category, the business transaction account methodology is taken into account with a weighting of High and Low Transactor. This looks at the overall costs of the accounts and the features of each transaction account. Business Deposits New Zealand Star Ratings To arrive at the total score CANSTAR applies a weight (w) against the Pricing (P) and Features (F). This weight will vary for each profile and will reflect the relative importance of either costs or features in determining the best business deposit account. This method can be summarised as: TOTAL SCORE ( T ) = PRICING ( P ) + FEATURES SCORE ( F ) Pricing score 60-75% Rates Historical rates & current rate calculation 10-75% Scenario fees Customer transaction scenario 25-90% Feature score 25-40% Indexed Score Product with the best pricing or features will receive a full score Accessibility Across New Zealand 5-10% Product features Across three categories 90-95% All transaction accounts and internet accounts specifically marketed to small businesses are eligible to be included in the business deposit account star ratings. Profile Pricing score Feature score Low Transactor 60% 40% High Transactor 60% 40% Online Saver 75% 25% 7

9 Pricing score The pricing score of the business deposits is broken down into two components Rates and Scenario fees. The weighting of each component to the customer profile differs and the weightings we apply are displayed in the table below. Rate Profile Scenario fees Rate Low Transactor 90% 10% High Transactor 90% 10% Online Saver* 25% 75% *Online Saver requires an interest rate of at least 0.25% at $20k Interest paid on business savings account is an important component of the business saver profiles. The average interest rate paid across three nominated account balances as shown below is used to establish the account that pays the highest overall interest. The product found to pay the highest average balance based on the weightings in the table below receives the highest rate score. Historical rate balances Balances Low Transactor High Transactor Online Saver BALANCE 1 $3,000 $5,000 $10,000 BALANCE 2 $5,000 $10,000 $20,000 BALANCE 3 $10,000 $20,000 $70,000 Balances weightings The historical balances have a different level of importance to the profiles. The historical rates score is calculated using the percentages below. Balances Other profiles BALANCE 1 40% BALANCE 2 40% BALANCE 3 20% The rates component of the pricing score is broken down into two components for the Online Saver profile only. The additional component is an 18-month interest calculation that includes promotional rates where applicable. Both subcomponents are weighted equally for the only profile. Rates (Online saver profile only) 18-month total interest calculation Six-month historical average total rate 8

10 Total interest calculation The simple interest calculation is based on the interest earned on a $20,000 deposit over 18 months taking into account the promotional rate and length and the base interest rate. Fees transaction scenario The scenario analysis is conducted using CANSTAR s unique transaction calculator, which prices the transaction behaviour of 500 customer scenarios. The calculation incorporates transaction fees, fee rebates and free transaction limits. The product with the lowest overall cost for the 500 customer scenarios receives the highest scenario score. Transaction fee scenarios Online Saver Low Transactor High Transactor Average minimum balance $20,000 $5,000 $10,000 Average deposit per month - $50,000 $100,000 Average no. of transactions/ month Internet transaction 100% 30% 25% Branch cash withdrawal - 5% 5% Branch cash deposit - 5% 5% Cheque withdrawal - 5% 5% Cheque deposit - 5% 5% eftpos - 10% 10% ATM - 10% 5% Direct credit - 20% 25% Direct debit - 10% 15% Feature score The feature score is broken down into two parts features and accessibility. Features More than 100 individual features of each account are scored for positive traits and awarded a feature score. The table highlights the contribution of the various groups of information to award the business deposit accounts a feature score. Feature component Transactor Online Saver General features -Reporting options: passbook statement, internet, -Access channels: ATM, eftpos, phone, internet, cheque -Facilities: offset, overdraft, sweep, periodic payment Specific conditions -Interest details: calculations & payment frequency, balance used (open/closed/min/max, entire/portion), bonus interest -minimum: opening/subsequent deposit, ongoing bal, w/d -maximum withdrawals per d/w: ATM, eftpos, combined Internet security and online functionality -Secondary authentication: security, higher transfer limit available with secondary authentication 65% 20% 15% 30% 20% 9

11 Accessibility The accessibility component is broken up into two parts branch coverage and functionality. Accessibility components Transactor Online Saver Branch coverage 90% 95% Functionality 10% 5% Branch coverage While most banking these days is done electronically there are still important business functions that can only be solved by the presence of a branch, e.g. cash deposits and product application. The total number of branches from institutions is taken into account and those with a ratio of one branch to 40,000 of population are given the top score and the remainder indexed off this mark. Accessibility Accessibility takes into account such features as smart ATMs and deposit boxes. Business Credit Card Star Ratings To arrive at the total score CANSTAR applies a weight (w) against the Pricing (P) and Features (F). This weight will vary for each customer behaviour profile and will reflect the relative importance of either costs or features in determining the best value business credit card. This method can be summarised as: TOTAL SCORE ( T ) = PRICING ( P ) + FEATURES SCORE ( F ) Pricing score 20-80% Cost over 12 months Includes current interest and annual fee Six-month historical interest rate (Revolver profile only) Feature score 20-80% Features e.g. reward schemes, security Indexed score Product with the best pricing or features will receive a full score Unsecured business credit and charge cards are eligible to be included in the Business Credit Card Star Ratings. All eligible cards are assessed against two distinct business consumer behaviour profiles (Revolver and Transactor). Revolvers carry an outstanding balance on their card while Transactors pay off their outstanding balance each month. As charge cards do not encourage revolving, they were only eligible to be assessed against the Transactor profile. 10

12 The star ratings consider Pricing and Features to be the two components in the card user s value equation. The contribution of each of these components to the value proposition for the Business Revolver and the Business Transactor are explained in the table below. Business Credit Card Star Ratings components Profile Pricing score Features score Business Revolver 80% 20% Business Transactor 20% 80% Pricing score The pricing score for the Revolver profile is based on a six-month average historical interest rate and the current cost of revolving $5,000. Eighty per cent of the revolve amount is based on the purchase rate, with the remaining 20% based on the cash advance rate. For the Revolver profile the cost score and the six-month historical score are weighted evenly. The pricing score for the Transactor profile is based on the annual cost of keeping the card active. Cards that do not charge an ongoing fee automatically receive the maximum pricing score while other cards are awarded a score based on their annualised fees. Features score More than 100 individual features of each card are scored for positive traits and awarded a Features score. The factors assessed include: liability insurance, GST reporting, purchase rate and rewards program. The table below highlights the contribution of the various groups of information to award the business credit/charge card Features score. Features components Revolver Transactor Specific business card conditions 20% 20% Merchant acceptability 10% 5% Premium card facilities 15% 15% Card security 10% 10% General card terms 5% 10% Fees and charges 10% 5% Late payment/interest charged 5% 5% Repayment capabilities 5% 5% Rewards 20% 25% Total 100% 100% 11

13 The rewards score allocated to Rewards in the Transactor profile and Revolver profile is based on a product s best score from the following methodology: Flight rewards $60,000 $120,000 Rewards score (Select the best score from the two profiles) Cash/voucher rewards $60,000 $120,000 Where companion American Express /MasterCard/Visa programs exist the weighted score is used based on 60% Visa/MasterCard and 40% American Express Rewards Frequent flyer methodology Frequent Flyer Score Pricing score 90% Annual fee Cost of obtaining a rewards program: card fee plus frequent flyer program fee 20% for 120k 30% for 60k Flight scenarios Based on portion of three representative flight routes redeemed through two annual spending levels 80% for 120k Auckland Wellington 33% Auckland Sydney 33% Auckland Los Angeles 34% Feature score 10% Feature category Weight (%) Earning policies 20 Flight rewards 20 Instant rewards information 15 Travel rewards 15 Customer service information 10 Top-up policies 10 Account status information 5 Points expiration 5 Total

14 Cash/shopping voucher methodology Cash rewards score Pricing score 80% Net reward return 100% $60,000 $120,000 Feature score 20% Feature category Weight (%) Earning policies 30 Points capping information 20 Instant rewards information 20 Bonus points partners 15 Account status information 10 Points expiration 5 Total 100 Price score is determined through assessment of net reward return the dollar value of cash back less the cost of the card based on the two spending levels, $60K and $120K. Where companion American Express /MasterCard/Visa programs exist the weighted score is used based on 60% Visa/MasterCard and 40% American Express. How are the stars awarded? Each business banking product reviewed for the CANSTAR Business Banking Star Ratings is awarded points for its comparative pricing and for the array of positive features attached to the account. Points are aggregated to achieve a Pricing score (P) and a Features score (F). The total score received for each profile ranks the products. The stars are then awarded based on the distribution of the scores with the objective to award the top 5-10% of products with the CANSTAR five-star rating. 13

15 The results are reflected in a consumer-friendly CANSTAR star rating concept, with five stars denoting outstanding value. Does CANSTAR rate all products available in the market? We endeavour to include the majority of product providers in the market and to compare the product features most relevant to consumers in our ratings. However, this process is not always possible and it may be that not every product in the market is included in the rating nor every feature compared that is relevant to you. How many products and financial institutions are analysed? In order to calculate the ratings, CANSTAR analysed 12 term loans, seven overdrafts, 11 credit cards and 21 deposit accounts from leading financial institutions in New Zealand. How often are CANSTAR Small Business Banking Awards released? All ratings are fully recalculated every six months based on the latest features offered by each institution. The Small Business Banking Award is re-calculated on a yearly basis. CANSTAR also monitors rate changes on an ongoing basis. Does CANSTAR rate other product areas? CANSTAR researches, compares and rates the suite of banking and insurance products listed below. These star ratings use similar methodologies to guarantee quality, consistency and transparency. Results are freely available to consumers who use the star ratings as a guide to product excellence. The use of similar star ratings logos also builds consumer recognition of quality products across all categories. Please access the CANSTAR website at if you would like to view the latest star ratings reports of interest. Business deposits Cash PIE Credit cards Credit card rewards Home loans KiwiSaver Online banking Personal loans Savings accounts Transaction accounts Term deposits COPYRIGHT & TRADEMARKS CANSTAR New Zealand Limited ( ), The recipient must not reproduce or transmit to third parties the whole or any part of this work, whether attributed to CANSTAR or not, unless with prior written permission from CANSTAR, which if provided, may be provided on conditions. The word CANSTAR", the gold star in a circle logo (with or without surmounting stars), are trademarks or registered trademarks of CANSTAR Pty Ltd A.C.N Reference to third party products, services or other information by trade name, trademark or otherwise does not constitute or imply endorsement, sponsorship or recommendation of CANSTAR by the respective trademark owner. DISCLAIMER To the extent that any CANSTAR data, ratings or commentary constitutes general advice, this advice has been prepared by CANSTAR New Zealand Limited ( ) FSP and does not take into account your individual investment objectives, financial circumstances or needs. Information provided does not constitute financial, taxation or other professional advice and should not be relied upon as such. CANSTAR recommends that, before you make any financial decision, you seek professional advice from a suitably qualified adviser. A Product Disclosure Statement relating to the product should also be obtained and considered before making any decision about whether to acquire the product. CANSTAR acknowledges that past performance is not a reliable indicator of future performance. 14