Finance Market Update - 26 April 19
Allegedly a quarter of businesses have been declined for funding form banks. This is very worrying and a trend that could accelerate if the credit crunch gets worse. The government has just announced a new fund that might help, maybe…
Big banks big market share is under threat from smaller banks and alternative lenders, and we have at least 4 new banks launching into the market this year, will we see the big banks get a little smaller?
A major US fintech/online lender called OnDeck lender recently commissioned a research report that found 23% of businesses that applied for finance had their application declined.
I would say the number of respondents is a relatively small sample size of the over two million small businesses in Australia, but it reflects a harsh truth many small businesses face – accessing funds to grow is challenging.
This is a constant struggle for businesses of all sizes but is particularly acute for early stage businesses. Worryingly but not surprising the report also stated 37% of businesses who have been operating for less than 5 years were declined, this is markedly up from the wider average, and highlights the challenge for new businesses, who are not technology platforms or able to attract venture capital funding, face when trying to survive and grow.
The reasons for businesses being declined can be varied but often are a symptom of an upside-down view of business banking and lending, in that banks almost always need property as security to give a business a loan.
This is not true in every case as online lenders are willing and able to give a business with decent cashflow an unsecured loan, but loans from fintechs and online lenders can have ludicrously high rates and are very expensive.
What banks should be doing is backing businesses to grow, whether they have property security or not.
Current Prime Minister ScoMo has just announced a billion-dollar business growth fund in which the government will allocate $100 million of tax payers money to start and cross their fingers that the big banks will come to the party with many hundreds of millions more.
This fund will give eligible businesses equity funding, meaning they do not need to then borrow or give away equity to an investor.
While this makes great headlines leading up to the election, it does not really address capital requirements for many businesses, as to be eligible for funding from this new fund requires your business to already be quite substantial with over $2 million in revenue. It is not even a sure thing to actually happen.
Banks claim they want to put money out the door and into the hands of hard working small businesses owners are complaining that due to various regulation like the lofty ‘Responsible Banking’ laws, the ‘Banking Executive Accountability Regime’ (BEAR) and APRA well funding and looking to take legal action first and ask questions later, have all led to banks having to slow down their lending processes and say no a lot more, which is crunching down credit growth.
This kind of regulation on banks in particular is not unwarranted, as we have seen serious issues uncovered during the Royal Commission, but my point is that all these things combined just make the life of a small business owner more challenging and filled with obstacles that affect their business.
The rise of the new banks
This week aspiring ‘challenger’ financier Judo Capital was given an “Authorised Deposit Taking Institution” (ADI) license effectively making it a real-life bank and allowing the two former NAB bankers who are Co-CEO’s to change the name of their business to Judo Bank.
This is quite an exciting development as we see APRA, the prudential regulator who is responsible for banking licenses, start to issue more with Volt Bank getting their license last month, and Xinja and 86 400 in the waiting for their banking licenses to be approved later this year. As well as Up Bank who currently operates under Bendigo & Adelaide Bank as opposed to getting their own licence (for now) and is a mobile app bank.
This means that this year alone we could have at least 4 new fully functioning and operational digital native and user focused banks in Australia. All of whom over time will provide genuinely appealing products, experiences and solutions that the big 4 and others banks currently provide.
This is excellent news for businesses and mortgage holders alike and is the start of a long-term structural shift where Fintechs and challenger banks start to become legitimate alternatives to traditional banks.
According to AFG (Australian Finance Group) who is a broker aggregator, over 2013 to 2019 the market share of deals from brokers to the big 4 banks declined from 78.2% to 58.6%. That is a massive downward shift and one that I anticipate will continue in the broader market as new digital native banks get onto people’s mobile phones.
The launch of the new banks will also benefit businesses over the medium to long term once they start to roll into the commercial lending and business banking segments. That will take a while and not all of them will actually end up in that space, but once they start offering credit to businesses it will increase competition in the market which will ultimately be a good thing for businesses.
With the new banks, big banks, regional banks, foreign banks, building societies and credit unions offering banking products, everyday people with everyday debit accounts, cards and home loans we will soon be spoilt for choice. Yes, more competition is a good thing, but it can also be very confusing.
It would be amiss of me not to point out this great video on TED on the paradox of choice, which the presenter talks about how with less choice there is less anxiety, meaning with more choice we feel more anxiety.
I think this idea is applicable to the financial services market in Australia, because there are literally thousands of home loan products from hundreds of lenders in the Australian market.
This is where working with a modern and independent broker like Skyward Financial helps. We work across a spectrum of lenders for both business loans and home loans and understand which lenders are likely to raise rates sooner, who will offer the features most beneficial for your individual situation and which banks are actually lending.