Borderline Risk: Four in Five UK SMEs Plan to Increase Overseas Spending but Ring-Fencing Rules Raise the Spectre of Debanking

Four in five UK small businesses are looking to increase their international payments in the year ahead, but looking beyond domestic trade may heighten their risk of being debanked, according to a new report by cross-border payment provider IFX Payments1.

The inaugural Moving Money report, based on interviews with finance directors across the country, explores the needs and experiences of British SMEs with cross-border payments and what is both driving and holding back positive change.

Four out of five businesses (78%) surveyed said they expected to make more international payments in the next 12 months, whether through increased importing, exporting or paying the salaries of overseas employees1. This positive outlook is applied across global trading partners. Europe was the most popular region for expansion, with two-thirds (64%) of SMEs expecting growth there despite new trade and financial services barriers in the wake of Brexit1.

Amid the optimism, however, three-quarters of small firms (76%) said they intended to do more hedging against currency risk, recognising the significant effect recent geopolitical events like the Ukraine invasion, upcoming elections and the Israel-Gaza war have had on currency markets1.

Ring-fencing and debanking

Meanwhile, the Moving Money Report explores how rules introduced to separate banks’ retail and investment activities are creating more problems for SMEs, including the risk of debanking. Most small firms – with less than 50 employees or revenue of under £ 6.5 million – have been ring-fenced into the retail arms of banks, meaning their deposits cannot be used for investments. This makes it harder for banks to monetise these accounts, and as a result, the service provided to business customers is diluted.

Last year major banks closed more than 140,000 business accounts, accounting for over 1 in 40 (2.7%) of the SME accounts held by the UK’s eight largest lenders3. Reasons for these closures range from concerns over financial crime and fraud to customers’ inability to provide requested information, reflecting the banks’ risk assessment practices. However, the limited transparency in these decisions, with only three of the big banks disclosing data on risk appetite, raises concerns about the fairness and consistency of their actions.

In February, a debanking report published by the All-Party Parliamentary Group on Business Banking said that banks “made little or no profit serving the bulk of SMEs”. It suggested that with banks’ additional compliance costs involved in servicing some businesses the “obvious commercial decision is to avoid the customer”4. With the extra complexities entailed by trading overseas, from taxation to licensing, small firms looking to expand could be putting their heads above the parapet.

Last month, the Treasury Committee said that UK small businesses were facing “needlessly tough circumstances” caused by banks’ and regulators’ actions2. The committee’s report stated that “any SME with a legal business should be able to access a bank account” and has called upon the Financial Conduct Authority to publish instructions later this year about how criteria like “reputational risk” or “risk appetite” should be used within ring-fencing regulations5.

The Moving Money report found that 70% of UK SMEs used banks for their foreign exchange, despite often incurring higher costs through fees than specialist fintech providers. Speed of transaction management was the biggest priority when arranging international payments, highlighted by over a third of SMEs (37%) surveyed. This was followed by cost-effectiveness (33%), suggesting that many firms are not shopping around for their FX1.

Will Marwick, CEO at IFX Payments, comments: “SMEs are arguably the backbone of Britain’s economy, and the Government is looking to encourage more of them to export overseas as part of the UK’s trade strategy.

“Our Moving Money Report reveals that a large majority of firms are looking positively at their international trade, suggesting the ripple effects and uncertainty brought by Brexit and the pandemic are increasingly being seen in the rear-view mirror.

“However, cross-border payments continue to bring a range of challenges. For a business just scaling up and wanting to expand into overseas markets, the complexity of a traditional approach to making payments can present a significant barrier to getting started.”

Graham Ridley, Strategy Director at IFX Payments, comments: “Our Moving Money Report shows SMEs are chiefly looking for efficiency and cost-effectiveness when it comes to overseas payments. With banks struggling to be competitive with more agile fintech providers, however, many may be looking in the wrong places. They say the easiest money a business can make is the money it saves, yet the majority of SMEs pay far more than they need to by being over-reliant on banks for their payments and the management of FX.

“Aside from this loyalty penalty, small businesses deserve more support from the UK’s banks and regulators. While the intentions of ring-fencing rules were noble when they were introduced in 2019, it is clear they can inadvertently make it tougher for SMEs to get the financial support they need to grow. Debanking meanwhile is a threat no legitimate small business should face. More clarity is needed, and we look forward to future FCA guidance shining a light on the issue.”

¹ Survey data

² UK Parliament Treasury Committee, 8 May: Small businesses are facing ‘needlessly tougher’ circumstances due to actions of banks and regulators, MPs find

³ UK Parliament Treasury Committee, 27 February, 2024: New de-banking figures show more than 140,000 business accounts closed by major banks

⁴ All-Party Parliamentary Group on Business Banking, February 2024: De-banking report

⁵ House of Commons Treasury Committee, 1 May: SME Finance