It has been only weeks since news of the First Republic Bank collapse broke, marking the biggest bank failure since the 2008 financial crisis and the third just this year. You might think these bank failures are a novelty or an anomaly or even a surprise, but there has been a total of 71 since 2013. According to the Federal Deposit Insurance Corporation, between 2001 and 2023 there were 564 bank failures — almost 25 per year.
How could such bank closures affect your health care practice? The biggest impact, of course, would be a loss of funds or inability to access them, at least temporarily. Maybe tighter credit and lending requirements that impact your expansion and growth.
Those patients your practice relies on to maintain financial sustainability? A recession precipitated by a financial crisis often results in unemployment, meaning healthcare consumers lose their employee-sponsored insurance.
Some of the staff on which you so heavily rely to run your practice might not be exempt from a big bank collapse. Many of them most likely have mortgages to pay, and banking issues could cause an increase in interest rates along with the debt restrictions, making housing even less affordable than it has been during recent years.
Next up on the possible impact list is your vendors, especially those conducting treasury activities for your practice. This includes payroll service providers and account payable solution vendors. Such entities typically keep client funds — including yours – at a third-party bank before they settle disbursements. How these vendors manage the potential for risk with their banking partners may help determine which businesses they select to work with.
Questions to Ask Your Potential Banking Partner
You want a banking partner with a solid understanding of a health care business’s unique needs. When choosing what type of bank with which you want to do business, there are several factors to consider. We recommend you ask and consider the following questions of any potential bank with which you are considering doing business — online or on-premise:
- What types of services do you offer? In addition to checking and savings accounts, common business banking services consist of money market accounts, credit and debit cards, employee bank accounts, payroll services, loans, lines of credit and business insurance.
- What types of fees do you collect? Common bank fees include those for account maintenance, ATM use, excess withdrawals, overdraft, cashier’s checks, wire transfers, return deposits, debit and credit card replacement and funds transfers.
- Will my money be insured? Verify that any bank with which you do business is insured by the Federal Deposit Insurance Corporation (FDIC), meaning your deposits are covered for up to $250,000.
- What are your account balance requirements? Some banks charge a fee if your balance is under a certain dollar amount, and others require you to deposit a minimum amount to even open an account.
- How many ATMs do you have available, and do you charge for ATM use? Online banks sometimes have a policy that allows you to use designated ATMs free of charge.
- What interest rate(s) do you offer? For a business savings account, it is best to open one that produces a high yield. Online banks typically offer the highest interest rates.
- What technology do you utilize? If you plan to do any mobile banking, make sure the entity you select offers that capability. A bonus is a bank that will integrate well with the bookkeeping software your practice uses.
Key Actions to Take with Your Banking Partner(s)
Now that you know the type of questions to ask of any potential banking partner, there are three actions you and your practice should take with the financial institution(s) you select. The first entails setting up a business checking account for receivables and another for payables. The account designated solely for receivables is for the payments you receive from patients and other sources. The payables account should be utilized only for payments made by the business.
Another recommendation is to disperse your financial activities across at least a couple of different banking partners. Why? To mitigate concentration risk, which is any single exposure or group of exposures with the potential to produce losses large enough (relative to a bank's capital, total assets, or overall risk level) to threaten a bank's health or its ability to maintain its core operations. Being able to quickly and securely switch your treasury operations among more than a single banking partner is crucial to avoiding financial collapse due to the failure of your primary one.
Next, regularly review the status of your banking partnership and decide if it still offers a good working relationship for you and your practice. Monitor their financial health, and if it is not what you expect, reassess which bank(s) with which you want to partner.
For any health care practice looking for a bank that best meets its financial needs, the best practice is to do your research. Opt for an institution that is best suited to not only your financial goals and objectives but also the type of customer service you require. There is no right or wrong answer.
Banks are not solely in business to cash checks and deposit funds. Most offer an array of other products and services, from loans and credit cards to insurance and investment services.
Not all banks are the same, either. There are central banks, which set interest rates and control the flow of currency in a country along with supervising commercial banks. The central bank in the United States is the Federal Reserve. Then you have retail banks, which offer members of the general public financial products and services such as bank accounts, loans, and credit cards. Other types of banks are:
- Commercial Banks: Also sometimes referred to as corporate banks, accepts deposits, offers checking account services, makes various loans, and offers basic financial products like certificates of deposit (CDs) and savings accounts to individuals and businesses. Traditionally have been located in physical locations, but a growing number operate exclusively online.
- Investment Banks: These financial institutions provide financial services for corporate and institutional customers, such as investing and raising capital and arranging mergers and acquisitions.
- Regional Banks: The Federal Reserve defines regional banks as those with $10 billion to $100 billion in assets. Typically provide products like checking accounts, loans, and credit cards, as well as business banking services, especially for small businesses. Their name is a bit of a misnomer because they are termed regional due to the size of their assets, not where they are located.
- Community Banks: Depository or lending institutions that primarily serve businesses and individuals in a small geographic area. Focus on providing traditional banking services in their local communities. They obtain most of their core deposits locally and make many of their loans to local businesses. May not have the product range or branch networks available at larger institutions, and often provide loans to local businesses and individuals who may not qualify based on the more standardized criteria used by big banks.
- Credit Unions: These institutions provide financial products and services similar to other banks but typically serve individuals affiliated with a particular group (i.e., teachers, union employees).
Banks do not only vary based on the type of customer they serve. There are definite differences between online banking and physical, brick-and-mortar facilities, variances that certainly could have an impact on your health care practice.
For example, online banks often have lower fees and pay more interest on deposits than their on-premise counterparts. They are available 24/7, 365 days a year, offering convenience physical banks cannot match. No more having to drive to the bank and wait in line to speak with a teller.
There is less paper with which to deal — like those pesky deposit slips — and fewer checks to write. You can easily pay bills by setting up automatic payments for recurring expenses or establishing automated clearinghouse (ACH) debits and deposits to pay your vendors. That is fewer of those frustrating and unnecessary late fees.
What are the cons of using online banks? There are a few, such as often impersonal customer service. Many times, you are dealing with a chatbot or a bank representative over email or phone.
Some online banks have limitations on the number of deposits you can make, and check deposits occasionally take longer to process. Others will not allow you to deposit cash unless that bank is linked to an ATM that accepts cash.
Another potential disadvantage of working with online banks is security issues. No security safeguards are entirely foolproof, leaving you open to identity theft. Plus, if your bank’s server goes down for scheduled website maintenance or due to an unexpected outage caused by a natural disaster, you may not be able to access your account — or funds — for anywhere from minutes to hours.
Now onto the pros of in-person banking, probably the primary of which is more personalized service. That often translates into more account-ability (pun intended).
Most of the time, the employees of your local bank are members of the community your practice serves. They most likely serve many other companies in the area and have a vested interest in seeing businesses in their community thrive.
You can discuss banking and investment management services with them in person, not only digitally. Many times, employees at on-premise banks take pride in knowing their customers’ needs and financial histories, giving them a leg up on the customer service — or lack thereof — of online banks.
Also, depositing cash is often easier when you have an account with a physical bank. This is important because cash deposits typically are available faster than checks.
Drawbacks of having your account with a brick-and-mortar bank? They can have higher overhead than online banks and have set hours, potentially limiting access.
The three big banking busts of 2023 certainly were not the first of their kind — and they will not be the last. That is why, as a health care business, it is important that you know what type of bank is handling your money and how to make sure it is the best choice for you.
SpringParker: Accelerating Healthcare Performance
At SpringParker, we help you improve profitability, optimize costs, manage risk, improve processes, increase the speed and size of your return on investment, and achieve transformational change. We have vast experience with organizations of all kinds, from single doctor health care practices to large integrated health care systems. Contact us to learn more!