There is a giant gulf that’s opened up between most of the banks in Australia and the SME sector, which just happens to be the most promising engine of growth in this country.
Why? Because SMEs are being hamstrung by poor cashflow and they need financial support at a time when the banking industry is rife with slow processing times, onerous onboarding practices and outdated systems. That’s not to mention the ever-increasing restrictions to lending practices and risk appetite.
And this is despite the fact that the banks’ most reliable source of income, mortgage lending, has recently become a much more competitive market than it was.
Banks are realising they need to be smarter to remain competitive. It's not just going to be ticking boxes and giving an LVR against a property. Margins have been squeezed and the super funds are putting them all on notice, because they've got more money than all the banks put together and will no doubt look for new avenues of investment in the short future.
They need to realise the world has moved on.
The banks have fallen behind while relying on a revenue stream based on the leisurely business of mortgages (which we all know moves at a snail’s pace) when the biggest opportunity for new lending revenue, short term and ongoing financing for SMEs, needs to move at the speed of light.
The massive advantage that digitally connected lenders enjoy is that they can hook up to their clients’ accounting software such as MYOB and Xero in such a way that an enormous amount of relevant financial information is put in front of the lender in a matter of seconds. That’s on top of the credit information that’s available in real time.
This allows a lending decision to take place in minutes, but also surfaces a wider set of data that bank lenders have traditionally not integrated into their processes.
We know that traditional lenders take weeks, sometimes months to make a lending decision. The platform we’ve built can plug in the historical and real time information about a borrower’s ‘current state’ and we can usually make a decision within hours.
Bear in mind that the longer a lender takes to make a decision, the more likely it is that the borrower’s circumstances have changed. Starting the process again isn’t uncommon.
So why don’t the banks build some serious new FinTech?
They are hesitant to build anything because it takes time, resources and specialised knowledge. Not to mention the risk of failure. It can’t just be another product in the suite.
The stakes are high when you’ve got a balance sheet full of cash and long line of detractors lining up to see you fail. It’s hardly worth the punt. Let everyone else make the mistakes first. One smart compromise that some have made is to partner with emerging Aussie FinTechs.
And what about risk? It’s a crucial consideration for all lenders but advances in technology mitigate potential risks effectively. These days we’re increasingly looking at preventative risk, rather than the retrospective variety we’ve been accustomed too. Retrospective risk assessment is a bit like air crash investigation. Where did the money go?
Now there’s been countless examples of large lenders failing to assess risk properly and unsurprisingly there have been losses. Significant losses in some instances. In almost every case due diligence and process (or lack thereof) were to blame but advances in technology can mitigate potential risks effectively.
That’s not intended as a cautionary tale for potential users of invoice financing: it just shows the mismatch between the demand for financing and a lack of oversight we’re sadly accustomed to.
And it’s a reminder that if the banks and large lenders pull out of any related form of lending, they’re leaving SMEs in the lurch. Especially the businesses that desperately need funding.
We’re proud to have built technology that can help provide short term finance to SMEs reliably, efficiently and quickly, no matter what other slow-moving financiers are doing. We’re making our platform available to license to banks to ensure they can stay ahead of the curve and remain competitive in the new digital banking age.