September 2, 2022

What is Banking Bias?

Banks are the cornerstone of the modern economy

Banks are the cornerstone of the modern economy. They are essential to small and medium-sized enterprises (SMEs) or small businesses, and offer a host of benefits, products, and services from credit facilities, loans, a secure place to save money, transact, and more.

However, with changing needs and trends, traditional, large, brick-and-mortar banking has its limitations. Banking bias is one such limitation. Its unintended discrimination that occurs when SMEs rely heavily on banks or assume they are the best or the only option. This is not to generalize or paint with a broad stroke.

This is due to the force of old habits, limited awareness of alternatives or other options, the omnipresence of banks, or their higher decibel of marketing. Some SMEs are also conservative and prefer to use banks because everyone uses them or located nearby.

There are various prejudices that can have a significant impact on SMEs. Banking bias can result in SMEs paying a lot more, being locked-in, or denied access to financial opportunities leading to social and economic inequality.

Types of Banking bias:

Within banking itself, a few types of bias can occur. This is not to say it applies to all, but they can affect your business – directly or indirectly. Here are some examples:

  • Lending bias: SMEs are denied access to credit or loans because of their financial status, or business owners have low or no credit scores.
  • Service bias: SMEs maybe charged higher fees; receive poor or delayed service based on the type of business account, or company’s bank balance.
  • Investment bias: SMEs are denied access or not shown all the possible investment opportunities; may receive lower returns or miss better investment opportunities.

What are the alternatives to solve bank bias?

Worldwide, there are approximately 25,000 fully licensed banks. Outside this, there is an ecosystem of non-banking finance companies (NBFCs) that are regulated, trusted, and used by millions of SMEs every day. They do not hold a traditional banking license, but offer similar, on par, or better products and services than what’s provided by large traditional banks,

For example, there are 60,000 quasi-licensed banks, financial cooperatives, microfinance, post offices, peer-to-peer (P2P) lending platforms, securities, commodities firms (e.g., brokers/dealers, mutual funds, commodity traders), chit funds, mortgage lenders, and insurance companies.

Being smaller in size or with a regional focus, driven by fintech, leveraging digital trends the majority provide help small businesses in less affluent neighbourhoods, towns, and rural areas. They play a crucial role in unmet demand by offer directing contact, eliminating intermediaries, provide high yields for investors.

Bankingly for example caters to help medium and small financial institutions so they can offer faster, better products, and improved customer service with digital channels. This in turn helps their customers, who may suffer from banking bias and are financially excluded, or underbanked.

How to combat banking bias?

Investigate and explore all possible alternatives to understand what is best for your business. Making such decisions consistently and with all the information on the table will allow you to achieve better business results.

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