Banks feel the heat from new business lenders

By Shaun Drummond – April 2016

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New online business lenders are beginning to dent the outlook for banks' business divisions, with close to 40 per cent of small businesses considering using alternatives to the banks. East & Partners' March quarter survey of senior business managers shows a quarter of the 1000 businesses it polled had applied for loans at non-banks. About 39 per cent of micro and small-to-mid-sized business said they had considered using non-bank finance in the past six months, up from between 23 per cent for micro and 26 per cent for SMEs three years ago.

 

East & Partners head of market analysis Martin Smith said the difference is almost entirely due to the new breed of lenders that have appeared in that time. "The number of other providers is skyrocketing, so businesses are weighing up their alternative solutions," he said. The propensity to switch is showing up even though many of the new lenders say there is still very low awareness among businesses that there is now an alternative to the banks. Many also say they are not competing directly with banks because they are mainly making unsecured loans, which banks do not generally offer.

 

Mr Smith said this rings true as much of the time the respondents to the regular survey say they are using non-bank lenders for "one-off" working capital loans, but this is also important business for the banks to keep to maintain a good relationship with their customers. "Ultimately, if one of their customers is taking products from someone else, then that would be a concern for the banks," he said.

 

The online lenders range from small local start-ups to global giants such as PayPal – with very quick approval processes, particularly for cashflow loans. East & Partners' March quarter survey of senior business managers shows a quarter of the 1000 businesses it polled had applied for loans at non-banks.

 

The very biggest businesses also reported a shift to non-bank lending, but many also said they were using less alternative sources since 2013. Larger businesses are less likely to use the new lenders because they often don't have the capacity to serve their needs, plus larger companies have access to other alternatives, like debt markets.

 

The survey found recent publicity over poor culture at banks is unlikely to make a big difference to businesses' bank choice. But big business is more worried about bank conduct than their smaller counterparts. "The larger the business, the higher the importance compared to small business," it said. "The results emphasise the fact that there are more pressing issues at hand for small businesses such as working capital constraints/lack of incentive to invest in new tech and productive capacity to seize the government 'innovation' imperative.

 

"Larger businesses exhibit a clear expectation that their bank is doing the right thing, open and honest in their dealings. "A global study by KPMG and various universities, including the University of Sydney, released in March found "alternative" business loans is by far the fastest growing part of fintech in Australia. It found $120 million of lending had been made to business by these new lenders in the past year out of total funding from the fintech sector of $466 million. However, this is still a tiny proportion of overall business lending in Australia. Accordingto the Reserve Bank, in January there was about $835 billion in business loans outstanding.