Business bank accounts are the focal point of any business. It’s the vehicle by which you’re paid and how you pay others. Banks will assess its data when you apply for finance to grow your business or a mortgage when you secure a family home. So it may seem surprising that IPSE research found that a third of freelancers (32.9%) do not solely use a business bank account to run their business. IPSE’s paper into basic business banking for the self-employed investigates why banking doesn’t add up for so many of this growing group, and what can be done to fix it.
We all have a role to play in shaping a new financial services environment to support the economy of the future. More and more people are making it on their own – now is the time to ensure they are properly supported.
Sometimes regulators don’t recognise the little guy – the self-employed. Under current regulation that defines SMEs, a contractor working through an incorporated company is treated in the same way as a micro-enterprise with nine employees and a turnover and/or balance sheet of €2 million.
This can mean the system isn’t always set up to support the self-employed. It doesn’t recognise that this group faces unique challenges and may mean some products aren’t suited to them. I’m sure we’d all like to have an assistant to research the best deals and a finance director to negotiate terms and conditions with our bank, but the reality is the self-employed must manage their finances independently. Regulation needs to reflect this.
The future of banking
Data sharing is about to change the way we bank. Payment Services Directive II, European Union legislation set to be law by the end of 2017, will mean banks across the single market will have to open up their payment capabilities, enabling customers to receive their own data and share it with third parties.
Freelancers welcome the opportunities afforded by new technologies. IPSE research found that nearly two-thirds (64.4%) of those surveyed said the ability to link a business bank account to other software they use to run their business (e.g. bookkeeping, accounting and/or invoicing) would be very useful or somewhat useful for their business.
Innovative cloud-based accounting, bookkeeping and invoicing solutions will play an increasingly important role, and could provide the self-employed with a streamlined banking experience through a basic business bank account. All a freelancer would have to do is log in to their accounting platform, select their business bank account and give their permission for data to be shared. Given the Government’s ambition for paperless ‘real-time’ accounts by 2020 as part of its Making Tax Digital agenda, there is potential for data sharing for tax purposes to be streamlined further.
IPSE research also found that three in five freelancers with no business bank account said advanced internet and mobile banking facilities would be useful for their business, including web chat. Here technology can also help to provide a more efficient banking service for people who have to shoulder the burden of running their entire business on their own.
The role of challengers
Julie Deane OBE, founder of the Cambridge Satchel Company, said in her review into self-employment that “the financial institutions that choose to address this need [for more flexible financial solutions for the self-employed] stand to benefit enormously”. Currently, the market for business banking is concentrated with the big banks. The four largest providers of business current accounts serve 83% of business account holders in England and Wales, and a greater share in Scotland and Northern Ireland.
There may be a role here for challenger banks to disrupt the retail banking market for the self-employed. According to Warren Mead, head of Challenger Banks and Global Co-Lead Fintech, at accountancy firm KPMG, in order for challengers to be successful “banks need to either develop a cost advantage or differentiate in order to compete effectively”.
Not only could remote banking facilities, such as web chats, cost new market entrants less than branch overheads, they would also offer quick, flexible access to a trained adviser offering specialised business and finance advice to freelancers and the self-employed on products such as mortgages and pensions. Remote banking facilities, more than half of our survey respondents said, would be very useful or somewhat useful for their business.
Saving for the future
The self-employed are defined by their flexibility and so need a flexible way to save. Dr Jonathan Sapsed, Principal Research Fellow at the Brighton Business School Centre for Research in Innovation Management (CENTRIM), has written about the benefits of a basic business bank account for the self-employed and the need for “flexibility to manage the feast and famine of workflow”.
Such a bank account could be linked to a regular savings product offering low minimum payment requirements and/or allowing for missed payments to be made up in following months. This would take into account the project-based nature of self-employment and allow freelancers to save conveniently and responsibly to enable them to, for example, pay their taxes or save a deposit for a mortgage.
IPSE research also found that one in five freelancers surveyed do not have a business bank account because the fees and charges are higher than those of their personal account. Basic business bank accounts for freelancers and the self-employed could offer overdrafts, some of which would be free of charge and not repayable on demand; this would allow freelancers to account for late payments or fluctuations in demand, and plan for the future, with greater certainty. The Competition and Markets Authority (CMA), which regulates the industry, recently called for banks to cap unarranged overdraft fees and provide warnings to customers before they go overdrawn. This is a welcome step toward fairer fees.
Uptake for switching bank accounts is low. More than eight in 10 (84.8%) had never switched the account they use for their business from one bank to another. The CMA’s proposed development of new online comparisons tools, where the costs of other accounts would be tailored to reflect individual consumers’ specific usage, could go a long way towards raising awareness and increasing rates of switching. With awareness of switching being low, the Current Account Switch Service (CASS) must be better signposted by the Government and the successor to the Money Advice Service as well as organisations like IPSE.
Frequently Asked Questions
We asked Kingsbridge Insurance, sponsor of the IPSE QA Awards this year, some of the questions most frequently asked by the self-employed.
Will the person who hired me have insurance to cover me?
Unfortunately, as you’re not a permanent employee it’s very unlikely that you’d be covered under your employers’ insurance policy. That being said, you should always check the finer details of your contract to see if you are.
If you were to make a mistake in the course of your work, or damage something in your new workspace, then the person who hired you is the most likely person to make a claim against you.
It’s also worth noting that having your own insurance in place is an excellent IR35 indicator, demonstrating that you are both a bona fide company and fiscally responsible for your own risk.
Why do I need employers’ liability insurance when I don’t have any employees?
We understand this seems like a strange one – but bear with us.
Employers’ liability is included because of something called the substitution clause, which appears in the majority of contracts. If you cannot work for whatever reason this clause allows you to substitute in somebody to complete the contract on behalf of your limited company.
This is rarely actioned, but is often contractually required and only accounts for a very small percentage of the overall policy price you pay. You’ll find it included in many freelancer insurance packages for that reason.
I’ve been freelancing for a long time and I’ve never been asked to have insurance cover before. Why do I need it now?
It may seem frustrating that all of a sudden you’re being asked to make sure you have insurance for a role you’ve been fulfilling trouble-free for years. However, compliance has recently become a hot topic.
Almost all agencies and end clients will now have something in their contractual terms stating that you need cover, although they may not directly ask for proof.
Over recent years a stipulation for cover has become more apparent. If a contractor makes a mistake and does not have the appropriate business insurance, the agency and/or end client has to pay for any damages. This has led to greater emphasis being placed on compliance.
My freelancer friends, as well as my line manager in my new job, told me I don’t need insurance cover. Is that correct?
It’s important to remember that a lot of managers are PAYE members of staff and may not be aware of the differences in requirements for PAYE staff and freelancers. Furthermore, many freelancers still do not have cover and as such are unaware of the requirements. If in doubt, always refer to your contract to check where you stand.