Banking: Back to basics - The right account

Choosing a bank account for your charity can be bewildering, but prioritising your needs and taking a step-by-step approach can make the whole process more manageable, as Alex Blyth reports.

Charities are losing up to £75m in interest payments every year, according to recent research from Alliance & Leicester. The bank revealed that six out of 10 charities have not set up a deposit savings account offering higher interest rates.

Given the pressure on most charities to achieve more with diminishing funds, this is extraordinary. While fundraisers are squeezing donors for every last penny and everyone in the organisation is scrutinising every single expense, finance departments could be wasting vast sums of money by not using the best possible bank account.

It is, of course, not that easy to select the right account. Even a small organisation will perform a wide range and great number of banking transactions.

Calculating exact interest payments and account fees can be very time-consuming and choosing a bank is often about more than simple monetary calculations. Every organisation has different requirements. Some want close customer service, others high control over their finances, or reassurance over the security of their funds. A growing number of organisations are demanding that their banking partner operates an ethical investment policy.

It is complicated, but getting it right is important. This step-by-step guide is designed to assist those not-for-profit organisations choosing their first bank account, or those that are reviewing their existing banking arrangements.

1 Work out what you use your bank for Before even looking at any brochures or websites, you must work out what you want from a bank. You need to ask questions such as how money enters and leaves the organisation, what you have contingency funds for, whether you have excess funds that could be earning interest, how many transactions go through your account each month, and what you use bank branches for. You then need to consider how this might change in the next two to three years. For instance, factor in any new sources of income, staff changes, technology, and borrowing requirements.

2 Find out what's out there Once you have a clear picture of your current and future requirements, you should collect as much information as possible about the various accounts on offer. You can match their offers against your needs and so begin to develop a shortlist. Gary Spilman, finance director at Motability, reviews his relationship with Barclays once every three years and, even though he has happily stuck with it for a decade, he still conducts a thorough review: "We invest three to four man-days in it, and really go through all our different options to be sure we're getting the best possible deal." He also recommends speaking to peers, perhaps through the Charity Finance Directors Group.

While many banks argue that charities need a bank account that has been specifically designed with them in mind, this is not necessarily the case.

Many charities happily use a regular business account from a high-street bank. Many charity products are very good, but if they are better than a non-specialist alternative this is probably because their charges, interest rates, customer service, accessibility, or security are superior - not just because they were designed for charities.

3 Do the maths By leaving money in your accounts you will earn money from banks in the form of interest. From this you need to deduct the charges, such as fixed monthly fees, or individual transaction costs, that the bank will apply to your account. This allows you to work out how much you will earn from your bank account, or how much it will cost you. Many bank customers are lured in by the promise of high interest rates, only to find out that these attractive rates are offset by equally high charges.

Conversely, the benefits of free banking can be undermined by low interest rates. Your responsibility is to find out the rates and to know what activity is likely on your account. This will enable you to make an informed decision about the best financial proposition for you.

4 Consider customer service levels Recent research by the Charities Aid Foundation found that charity customers of high-street banks see customer service as more important than interest rates and charges.

Derek Pernak, finance director at deafblind charity Sense, is one who certainly rates it highly. "Poor banking service is expensive," he says.

"As a finance director of a charity whose transactions fill numerous bank statements every day, I need a bank that can assist my staff to administer the finances of the charity efficiently."

Most banks now provide their business and charity customers with individual relationship managers. Ideally you should meet him or her before signing up. Beyond that, the only way to find out how good a bank is at customer service is to use them. You can ask for recommendations from peers in the sector, but remember that they have different requirements and priorities to you, so might take a different view of customer service levels. The Co-Operative Bank has tried to differentiate itself on customer service by outlining five promises which it guarantees to keep, and it will send customers £25 if it fails to keep any one of those promises.

5 Ask how your staff will access the account When you open a personal bank account, you only have to consider how you intend to use it. Your charity's account, on the other hand, will be used by most people in your organisation, and so you need to consider how easy it will be for them to access it. For instance, Oxfam has been primarily with NatWest for more than a decade because it has such an extensive network of branches.

As finance director, Tim Childs explains: "With about 750 shops, Oxfam needs a bank with a high-street presence in most locations, so we are limited to the main clearing banks."

Increasingly, not-for-profit organisations are working with banks to integrate their systems and allow greater efficiencies, often through online banking. The Royal National Lifeboat Institution's finance director, Charles Watton, says: "There is little difference between banks on charges and interest rates; it is levels of service and system advantages that make the real difference."

6 Ensure your money will be safe One in three UK businesses has been a victim of credit card fraud, according to the Association for Payment Clearing Services, so it's not surprising that charities want to do everything they can to safeguard the finances they entrust to a bank. Unity Trust Bank is one of several in the market to have recognised the need for increased security. The bank's national charities manager, Mark Davies, describes how it has responded. "If a client requires it, we can set up our dual authority internet banking service," he says. "This requires two signatures to authorise a payment and is popular among security-conscious charities."

7 Consult your conscience A growing number of charities believe that they have a responsibility not to hold an account with a bank that invests their money in activities that are inconsistent with the objectives of the charity. For instance, should a charity promoting child welfare use a bank that invests in companies that use child labour? Demand from charities, as well as from individuals and even corporates, has driven the growth of banks such as the Co-Op, which does not invest in unethical areas, and Triodos Bank, which only invests in environmental and social projects.

Often these sounder ethics come at a price of higher charges or lower interest rates for the customer, but not in every case. Peter Mitchell, head of banking and investment at CAF, says: "While there is a case for charities using their weight to influence the behaviour of banks, many charities are prioritising between this pressure and the need to deliver their primary mission."

Some high street banks also argue that they contribute to society. The Royal Bank of Scotland points to its programme of sponsorship and support for the third sector, which last year exceeded £40m.

8 Review your decision regularly Experts advise charities to review their banking arrangements about once every three years. If you have conducted a review and found that a new bank will provide you with more of what you need, then it is time to make the move. There ought to be very few forms to fill in and it should not take too much time. In fact, changing banks is now so easy that there really is little excuse for charities to remain with an inappropriate bank.

However, Pernak at Sense concludes with some words of caution: "It will take time for the relationship with your bankers to develop.

Identify what you want to achieve, when you want to achieve it and how you will achieve it. Then monitor it to ensure that you are achieving it. If you aren't, say you aren't. Don't expect overnight miracles."

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