Why is it hard to open a bank account for new businesses?

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Nowadays, more and more people are starting online businesses. Due to this newfound accessibility that entrepreneurs have at their disposal, many are venturing out into fields such as e-commerce or becoming digital nomads.

Whilst many people may have had brilliant ideas and gone about setting up their companies, many start-ups meet their demise due to a lack of services available to them regarding the collection of payment. Furthermore, despite the importance of having a bank account for your business, there seem to be more and more hurdles one has to clear in order to set one up.

2019 was the hardest year for individuals to open bank accounts for their businesses, with 2020 looking to be just as difficult. In the west, most banks as well as new fintech providers such as Monzo and Nutmeg were fined more money than ever. These banking institutions faced pressure from regulatory bodies to carry out a lot more compliance and anti-money laundering checks. 

Here are the main reasons why it is hard for individuals to open a bank account for their new businesses in 2020:

 

1. Increased checks on compliance and anti-money laundering procedures

 

Currently, numerous regulatory bodies have increased checks on compliance and anti-money laundering tools, making it hard for individuals to open bank accounts for their businesses. There are several factors that have led to these increased measures.

  • Firstly, terror events in the past have led to increased scope into money laundering. These events are often funded by wealthy anonymous benefactors and as such banks are taking extreme measures to monitor the flow of money.
  • In addition to this, in the wake of the financial crisis, banks were required to tighten regulations in order to mitigate the risk that they were taking on.
  • By minimising the risk that these banks were taking on, this therefore increased the integrity of the financial system and reduced the likelihood of failure for both the banks and the banking system as a whole.

Many financial institutions across the world increasingly developed sophisticated tools. These tools are used to verify customer information and also to detect any suspicious transactions, thus detecting any money laundering issues. 

2. High Number of Requirements

Another reason why it is now becoming increasingly difficult for entrepreneurs and small business owners to open a business bank account is the high requirements required by the compliance departments within the banks and payment institutions.

The compliance departments check all the applications received to determine if they have fulfilled all the requirements. For your application to be approved, you are required to provide a business license with the business name and the owner’s names, organizing documents filed with the state, and potential partnership agreements. However, most entrepreneurs and small business owners do not provide all these requirements, and thus, they are not able to open bank accounts for their businesses.

 

3.Inadequate Financial and Shareholders’ Information

Having a comprehensive financial history makes it easy for the compliance department to analyse many things. With the financial history of any business, it is also easy for the compliance departments to determine the main sources of revenue for your business. These requirements, which every new business has to comply with and vary from one country to another, are making it hard for new businesses to be onboarded.

Merely providing documents relating to incorporation or regarding shareholder information may not be enough for some banks when what they’re really looking for is financial and bank statements which would in turn help the compliance departments be able to ascertain whether or not the new business would be a good customer.

This unfortunately leads to many banks being forced to turn them away. As banks receive thousands of applications, it simply isn’t worth it to them in some instances to take a risk on a new business when they have plenty of existing businesses already lined up.

 

4. Lack of business information stops the bank understanding your business

When banks look to onboard new businesses, their respective compliance departments will have to analyse every little detail about who they are taking on. This relates to the earlier point about minimising risk for the bank.

New businesses have become very difficult to onboard due to their lack of solid data regarding sales and revenue. They lack a history of business which would might otherwise provide the bank with some idea of whether or not the business would be profitable, and thus worth taking on.

 

5. Is your business profitable for the bank or payments Institutions

When it comes to new businesses banks are taking significant risk as they do not know the new company and do not have a relationship with the Directors. To take on this risk the Bank and payments institutions also do a profit and loss analysis to see if the customer will make enough transactions to justify the risk. As banks receive thousands of applications, it simply isn’t worth it to them in some instances to take a risk on a new business when they have plenty of existing businesses already lined up.

 

6. New AML5 rules around offshore entities

The European Union as in acted has enacted new anti-money laundering rules which increases the checks that a banks and money remitters need to make to open accounts. The impact of this has been a decrease in account opening for online companies by 50%.

 

The easiest way to get an online bank account to your new business

In conclusion, whilst the risk-averse nature of the financial system today makes it difficult for new businesses to set up bank accounts, this doesn’t mean it is impossible to do so. A good starting point for new businesses would be to ensure that they provide as much information as they possibly can to the banks.

This includes

  • all necessary documents regarding licencing and incorporation,
  • as well as a solid business model.

Providing as much information as possible will aid the banks in their understanding of not only the type of business conducted by the company but also of the company’s potential profitability, and therefore their ability to make a good company according to the compliance department’s risk requirements.

 

  • Barclays
  • Techstars
  • Nestholma
  • Nordea
  • Tekes
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