Examining the fintech appeal of business lending in Australia
A question often asked in the fintech space is, “Which area of fintech has the greatest potential?” The answer invariably sticks with the obvious – insurtech, blockchain, mobile payments, peer-to-peer lending and banking – and while focus to these areas is deserved, business lending has been exponentially gaining steam.
Lenders are flocking to the market and it seems every week there is a new entrant, partnership or innovation. The online business lending space is full of diversified products and lenders are constantly looking for new ways to benefit business borrowers. The market is becoming flooded by choice.
So, what is the appeal? It’s simple. The space exemplifies fintech as it should be. The market is in high demand and it can’t be serviced profitably by banks. Products can be diverse, which leaves room for innovation. The market also remains largely unregulated.
Demand for loans that banks can’t match
Accessing bank finance is difficult for Australian SMEs that don’t have real estate assets, extensive credit histories or a proven track record. The rise of fintech business lenders has given cause for banks to rethink their strategies, either through partnering with fintechs or investing in their own technology to better service business customers.
The response from some traditional banks has been a scramble to lock down the competition.
This week Big Four lender NAB got caught tracking its business banking customers using Veda and other data sources. The bank would receive alerts when these customers approached competitors about business loans. NAB also launched its QuickBiz loan from its own innovation hub, again going against the curve and deciding not to partner with a fintech company.
While NAB turned in-house to fight back against its loss of business loans market share, other banks are also clamping down on business competition in a way they aren’t in other areas.
In December 2015, Commonwealth Bank made a referral deal with OnDeck to pass on customers that it can’t finance. Westpac has been moving further ahead on the fintech investment front, partnering with online SME lender Prospa as well as small business broking platform Valiant Finance, the latter through its venture capital fund Reinventure.
Remembering that fintech needs to be viewed with a global lens, we can also see this phenomenon overseas. In the US, J.P. Morgan has partnered with OnDeck Capital, with the fintech company receiving fees to originate and service loans the bank’s business customers using its data processing.
There was already a high demand for loans for small businesses, that were agile and flexible, when fintech came along. Turning to alternative finance was a natural choice for business owners, and may be a reason for the rapid expansion of the market. Non-bank lenders are already receiving more than $1.1 billion of loan applications every month.
Diversity of business finance
No two businesses are the same, and so there’s plenty of room for innovation in the SME lending space. This is natural ground for fintech companies.
An interesting example in the Australian context is invoice financing. If you look at the major invoice financing players – Skippr, Waddle, FundX, Scottish Pacific – they are all quite different, and they also differ in the invoice financing legacy that came before them.
Skippr’s product is invoice financing coupled with a free cash management tool. Businesses can leverage the tool to forecast upcoming cash flow fluctuation periods and then use the company’s invoice financing service when they most need it. Waddle’s invoice funds come as a line of credit, which differ from its competitors that offer set loan terms.
Other alternative finance options for business include peer-to-peer business lending and robo advice. Businesses want flexibility from their finance products, and fintechs are ready and able to give it to them.
Regulation
Alternative finance lenders looking to lend to SMEs don’t require a credit licence and there’s no restriction on the interest rates they can charge. This could have negative outcomes in that lenders can charge exorbitant rates. But why would they?
The majority of online SME lenders are extremely transparent with fees and want to remain competitive in a space that is becoming ever more crowded. They are acting accordingly in what is a “yet-to-be-regulated-sandbox”.
However, despite not being required to, some online business lenders (such as Prospa) already have credit licences.
Good news for business
Whatever’s ahead for the space, it’s good news for business. Application processes have been simplified and processing times have dropped from weeks to months. New products will emerge as partnerships diversify and both fintech companies and banks are able to explore new ways to service customers.
Thanks to the arrival of fintech, it’s never been a better time to be on either side of the business finance fence.
About the Author: Elizabeth Barry, Senior Writer at finder.com.au, has joined Australian FinTech as a guest writer. She has been writing about personal finance for over two years and has firsthand experience in the space having worked at finder.com.au in its start-up phase.
She is fascinated with the level of innovation happening in fintech and the way Australia is responding – at the individual, business and government level. She believes that established companies are ripe for disruption and that the fintech space is ready for acceleration.
She will be keeping an eye on the space as it grows and is eager to write about emerging developments on Australian FinTech.
