Australia is beginning to enjoy the benefits of a fintech boom, but for this emerging industry to grow properly it needs infrastructure support. Without it, we’re at risk of seeing Aussie fintechs left behind as overseas players dominate the Australian and Asian landscape.
There have been some welcome initiatives recently, like ASIC introducing a regulatory sandbox for start-ups to trial new ideas. But compared to other governments around the world, Australia doesn’t have the political support to turn this industry into a powerhouse.
That’s a huge missed opportunity.
Research from Frost & Sullivan predicts the Australian fintech market will add $1 billion in value by 2020. Missing out on this ride could be a massive loss for everyone involved. Morgan Stanley says that marketplace lending to small business (alone) in Australia will have an $11.4 billion market share by 2020 — just over three years away.
There are four main ways we can support Australian fintech now, in the medium term, and into the future:
1. Copy the initiatives that are working overseas
2. Require banks to refer to alternative lenders
3. Encourage fintech investors by enforcing minimum standard on the quality of advice
4. Standardise presentation of interest rates to SME borrowers
Continuing to build on the fintech boom requires a concerted approach by government, regulators, and fintech start-ups.
Learn from other countries
First, regulators and policy makers can look overseas, like ASIC did for the regulatory sandbox, which has also been implemented in the UK, Singapore and Thailand (and last week in Hong Kong). One of the methods by which marketplace lending gained a foothold in the UK was through direct government support.
Back in 2012, the UK Government-backed British Business Bank announced it would allocate £20 million to loans procured through Funding Circle, the predominant SME marketplace lender. The initiative was so successful that it increased that investment to £40 million in 2014.
This year, the European Investment Bank also announced it too would invest £100 million to SMEs through Funding Circle.
Australia’s fintech sector is years behind the UK, and if we are to grow at the same rate, the government should consider directly encouraging marketplace lending as an alternative to traditional business loans.
Make banks refer small businesses to alternative lenders
Another immediate solution would be requiring banks that decline any business loan application to refer that business to an alternative lender, especially a marketplace lender. This would encourage SMEs to find other sources of funds to grow and stay in business.
This is more than mere commerce. If that Australian small business can get a loan, with funds sourced from Australian investors and through an Australian marketplace lender, it helps grow the Australian economy and keep it resilient. A strong SME segment supports employment and even grows the country’s tax base, so the social benefits and profits stay in Australia.
At Bigstone, we have a strong focus on our proprietary credit risk assessment process — the core of our business is assessing creditworthy small businesses and allocating them with a suitable interest rate to reflect the risk that investors take in lending to them. This means that better businesses get better rates, and investors can have confidence in the loans we make.
Make SME loans transparent and comparable through a mandatory comparison rate
Australian consumer lending law requires lenders to disclose to consumer borrowers a ‘Comparison Rate’ — the annual percentage rate (APR) of the loan, calculated to include all charges that the borrower will face (whether they are characterised as interest or fees). This lets consumers easily compare loan offers between lenders.
There are no such requirements on SME lenders, and many of the different loan offers that a small business person weighs up can be expressed in very different terms — whether expressed as an annual, monthly, fortnightly or weekly interest rate, whether that rate is payable against the declining balance of the outstanding amount, or is a ‘flat rate’ loan, where interest is calculated against the initial loan amount, irrespective of repayments. Add in a differing set of establishment and ongoing fees, and comparing products becomes fiendishly difficult.
It would be a simple legislative change to extend the Comparison Rate concept to small business lending, and help small businesses be informed and get a fairer deal by mandating a level of transparency and comparability for SME lending. But that simple change could save unwary SMEs thousands of dollars, that they could spend on employment, inventory or growth.
Encourage investors by improving standards for investor advice
At Bigstone, our focus on accurately assessing credit risk means that we know that if we lend to a borrower we classify as “A”, the interest rate charged on the loan (from 8% p.a.) will be appropriate, with an appropriate increase in that rate for a “B” or “C”, to reflect the increased risk that investors are taking on. We have a sophisticated credit model built by industry leading experts and refined using cutting edge machine learning and data analytics.
However, other marketplace lenders might take a simple approach and simply combine a review of a SMEs financial statements with a credit report, leaving investors with an overly simplified score that doesn’t dig into the credit risk underlying each borrower.
ASIC should require a base level of sophistication for advice to investors in marketplace lenders, especially for those marketplace lenders that chase retail investors. A modern, data-based approach to risk should be reflected in licensing standards.
Standardise presentation of interest rates to SME borrowers
The government has recognised the blurred line between SMEs and consumers by extending the ‘unfair contract terms’ legislation to SMEs, effective later this year.
Now it is time for the government to mandate a level of transparency and comparability in the SME lending industry by requiring that lenders present SME borrowers with an APR for their product — an annual percentage rate that includes the lender’s fees.
Bottom line? The fintech sector, and marketplace lending in particular, has the potential to change Australian banking and finance, and help us grow into a regional hub for expansion into Asia. Doing so will help small businesses, and investors, get a fairer deal.