Debanking continues to hit the headlines as banks have considerable control and final rule over which accounts they choose to close without providing prior notice.
With calls for better and more legislation in this area, in this post, we look at debanking, its consequences, and why it occurs.
Of course, if you’re facing an invoice not paid situation, the team at Direct Route is always on hand to help. Providing a range of debt collection services and credit control processes, we help businesses maintain a healthy cash flow and ensure that late payments become a thing of the past.
What is debanking?
Debanking is when a bank offboards clients (closing the account of an individual or company), meaning they’re no longer able to make or receive payments.
The grey area currently is that banks can do this without providing any notice, AND it can happen to any type of business.
Banks have always had broad discretion in this area and have often used debanking as a way to protect themselves, distancing themselves from companies and individuals who could be a reputational risk to their very own business.
However, due to the heightened media scrutiny over the years relating to debanking, with some politicians even facing debanking situations, some banks have introduced a notice period of two months.
Note: In cases of fraud, no notice will be provided.
Once a company or individual has been debanked, you won’t be able to make or receive payments or indeed access any other banking services.
Check out our latest post on Net 30: A Guide to find out how to avoid late payment of invoices and improve business credit control procedures and cash flow.
Risks of debanking
Banks can choose who they debank based on the level of risk they pose.
Debanking does happen for several reasons, these include:
- When a bank believes the customer poses a regulatory, legal, financial, or reputational risk to them.
- If you don’t use your account or have not used the account in a long period of time, the bank will no longer want to spend money on account maintenance and staffing, etc., as at this stage, you will actually be costing the bank money.
- If you are misusing the account on numerous occasions. For example, you’re dipping into unauthorised overdrafts (often businesses fall into this trap if they’re experiencing late payment of invoices), or you don’t deposit money to cover pre-arranged payments.
- Your banking activity is considered unusual. For example, transferring large sums of money between countries would trigger this red flag.
- Lack of information sharing – there have been requests from the bank for updated information and a check of details, which have been ignored or failed to be provided.
Consequences of debanking
Debanking can cause considerable upheaval and stress on businesses and individuals as payments both into and out of the account become non-existent.
This makes everyday processes impossible, for example, paying staff and suppliers, purchasing goods and services, paying utilities and rates, and more.
Debanking can also cause reputational risk, marking you as a financial outcast.
Banks and other financial institutions also share information and data, and debanking and reasons for this can often be shared with others, which could prevent individuals and businesses from opening another account elsewhere.
If you have been debanked, you will receive notification of the final balance of your account with a cheque for that amount.
Late invoice payment
To avoid situations of debanking and ensure you maintain healthy working accounts:
Make sure to stay compliant – don’t undertake any illegal activity, remain financially compliant, abide by regulations, and support anti-financial crime requirements.
Always act with transparency – share information when requested, update details as required, and talk to your bank when facing any financial difficulties.
Implement good banking practices – good credit control can help to make or break a business. Keeping you on top of your credit accounts and ensuring cash flow remains healthy and supports the business.
With tighter rules around debanking proposed, including clearer explanations and better and more informed notice periods, more support is requested for businesses going forward.
For now, it’s important that businesses are aware of how to protect themselves from late payment, as this is the biggest problem facing small to medium sized businesses throughout the UK.
At Direct Route, we support businesses with their credit control processes and procedures to help avoid debanking situations and reduce the number of late invoices.
We work with businesses to provide various debt collection and credit control services that can be tailored to meet exact requirements – focusing on working with businesses to ensure a successful collection outcome and building and maintaining positive and longstanding relationships.
To find out more, speak to a member of our team today on +44 78601 97476 or email memberbenefits@directroute.co.uk with any specific questions or requirements.