The difficulties of opening a bank account.
Today, more and more people are starting businesses on the internet. Entrepreneurs now have more tools at their disposal, so many are taking risks in fields like e-commerce or becoming digital nomads.
Many start-ups fail because they don’t have the right tools to get paid. Many people don’t realise that it’s critical for their business to have a bank account. However, there are now a lot more hurdles that people must clear in order to get one set up.
2019 was the most difficult year for people to open bank accounts for their businesses, and 2020 looks like it will be even more difficult. In the west, most banks and new fintech providers like Monzo and Nutmeg were fined more money than ever before. These banks were told by regulatory bodies to do 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. Checks on compliance and anti-money laundering procedures have gone up.
There are now more regulations on compliance and anti-money laundering tools, which makes it hard for people to open bank accounts for their businesses. There are a lot of things that have led to these more strict rules.
First, terror events in the past have given more people the chance to look into money laundering. These events are often funded by wealthy anonymous donors, so banks are taking very strict steps to keep an eye on the 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 cutting back on the risk these banks were taking, this increased the integrity of the financial system and made it less likely that both the banks and the banking system as a whole would fail.
Many financial institutions around the world have been making their tools more complicated. These tools are used to make sure that customers are who they say they are and also to look for suspicious transactions, which means they can find money laundering problems.
2. High Number of Requirements
Entrepreneurs and small business owners are having a hard time getting a business bank account because of the strict rules that banks and payment companies have to follow.
The compliance department checks all the applications that are sent in to see if they meet all the rules. For your application to be approved, you need to show that you have a business licence with the name of the business and the names of the people who own it. You also need to show that you have organised documents that have been filed with the state. The problem is that most people who start businesses or run small businesses don’t meet all of these requirements, so they can’t open bank accounts for their businesses.
3. Inadequate Financial and Shareholder’s Information
Having a lot of information about your finances makes it easier for the compliance department to look at a lot of different things. Financial history also makes it easy for compliance departments to figure out where your business makes its money from. There are a lot of rules that new businesses have to follow, and they vary from country to country. This is making it hard for new businesses to get onboarded.
A lot of banks are looking for financial and bank statements, not just documents about the company’s incorporation or about its shareholders. This would help the bank’s compliance departments figure out if the new business would be a good customer.
This means that many banks are forced to turn them away. A new business might not be worth the risk for some banks because they already have a lot of other businesses lined up, so they don’t want to risk taking on a new one.
4. Lack of business information stops the bank understanding your business
Every time a bank wants to add a new business, their compliance departments will have to look into every single thing about them. Before, we talked about how to keep the bank safe. This is related to that.
New businesses have become very hard to work with because they don’t have a lot of information about how much they make and how much they sell. In this case, the bank doesn’t know if the business will make money, so it won’t take it on.
5. Profitable for the bank or payments Institutions
In terms of new businesses, banks are taking a lot of risk because they don’t know the company or the people who run it. They also do a profit and loss analysis to see if the customer will make enough transactions so that the risk is worth it, which is why the Bank and other payment providers do this. It may not be worth it for banks to risk a new business when they already have a lot of other businesses lined up. This is because banks get so many applications.
6. New AML5 rules around offshore entities
The European Union has passed new anti-money laundering rules that make it more difficult for banks and money senders to open accounts. These rules make it more difficult for people to open accounts. This has led to a 50% drop in account openings for online businesses.
The easiest way to get an online bank account to your new business
The risk-averse nature of the financial system today makes it hard for new businesses to open bank accounts. However, this doesn’t mean it’s impossible to do so. A good start for new businesses would be to make sure that they give as much information as possible to the banks.
This includes:
- all the paperwork you need to get licensed and set up a business,
- as well as a strong business plan.
As much information as possible will help the banks understand not only what kind of business the company does but also how profitable it could be, which will help them make a good company for the compliance department’s risk requirements.