What SMEs really want
The changing banking needs of SMEs are shifting the market from what was once a battleground between banks and alternative lenders to one of collaboration.
The small to medium sized (SME) business sector is vast and diverse. There are around 2.1 million businesses that cover a broad range of industries across retail, manufacturing and technology. They employ half of the workforce and account for one-fifth of Australia’s gross domestic product.
The sector is often touted as “the engine room of the economy” and while its significant contribution to the economy is recognised by both government and the banking sector, it is a market that remains underserviced.
“SMEs are traditionally time-poor, having to balance daily administration and accounting tasks with the day-to-day running of a business, Ian Pollari, global co-leader of KPMG’s fintech practice said.
SMEs want solutions that can help them address these challenges. They want their invoices to be paid on time. They want to spend less time on day-to-day administrative tasks to focus on running their business and they want the ability to access capital to help them with not only their daily cash flow but also to grow their business.
Banks relationships are also important to this sector. According to RFi Group research, proximity to branches, excellent customer service, a single-point-of-contact and the right products and services were among the top six SME wants from their primary bank.
In addressing these challenges, Pollari sees plenty of opportunity for key players to grow in the SME market particularly in the area of payments, accounting administration and online lending. Traditional payment offerings will also widen to harness new and innovative technologies as well as expand to include invoice management – a key priority for many small businesses.
Banks have already introduced a number of innovative payment solutions. For example, Albert, Commonwealth Bank’s point of sales terminal allows businesses to receive same-day payment settlements. Using Westpac’s Genie app, businesses can not only accept payments straight away but also generate and manage invoices by providing a ‘nudge’ or bill payment reminder to customers via/suppliers via their mobile phones. In December, the Australia and New Zealand Banking Group partnered with Invapay, a fintech based in the United Kingdom, to deliver automated payments to their business customers.
For Pollari, meeting the wider needs of SMEs will be increasingly achieved through collaboration. “It is an emerging opportunity where there will be a convergence between the banks, fintechs, marketplace lenders and data aggregators such as cloud-based accounting providers,” he said.
Indeed, banks now see the potential to expand in the SME sector by providing solutions that go beyond business lending. “It’s not just about providing a bank product to SMEs, it is about using the marketplace as well,” Westpac acting general manager for Westpac’s SME Business Bank Jeff Hurdis said.
And it is this marketplace where banks are not only providing innovative standalone products but are also forging partnerships. “Our strategic focus is on the ecosystem. National Australia Bank is not only providing traditional banking services but we are looking at who we should partner with in order to provide a broad offering to SMEs,” NAB acting chief customer officer for business and private banking Cindy Batchelor said.
Our strategic focus is on the ecosystem. NAB is not only providing traditional banking services but we are looking at who we should partner with in order to provide a broad offering to SMEs
In response to the unique needs of a diverse SME sector, NAB’s business banking includes specialised services in health, education and agriculture. For example, NAB health has collaborated with industry stakeholders and customers to help develop modern payment platforms such as Medipass, an ‘uber-like’ offering to doctors, patients and insurers and HICAPS.
“We consider ourselves to be Australia’s number one business bank. We have been lending to SMEs for 150 years, it really is in our DNA.” According to Batchelor, alliances with the broader ‘ecosystem’ will in part help NAB remain in the number one spot. In fact, Medipass was a start-up backed by the bank’s internal venture capital fund – NAB Ventures.
“It is the way of the future. As an organisation, we need to know where we can leverage our strengths and how we can partner with someone else who can bring capabilities to the table where the sum of parts are greater than the whole,” she said.
Similarly, Westpac has forged a number of partnerships to enable it to better service the market. Recognising the time constraints of its SME clients, Westpac has moved to provide solutions that address their accounting and human resources needs. The bank has secured an agreement with a start-up human resources administration platform, Flare HR for its SME customers. This business has the backing of Westpac’s venture capital fund Reinventures.
Hurdis notes that it costs the SME sector billions of dollars a year on customer and employee administration. The Flare HR deal allows SMEs to use the fintech’s services in employee hiring and contract administration.
Partnerships have also solidified in the cloud accounting space and businesses like Xero have formed a number of alliances with the banks including NAB. “The cloud-based accounting environment has become an important tool for SMEs. Partnering with providers like Xero allows us to extend our offering beyond banking,” Batchelor said. In fact, such partnerships could be key in addressing the thorny issue of access to capital that has consistently plagued the SME sector.
Access to capital
It’s a theme that will be tackled in the Productivity Commission’s Review into competition in Australia’s financial system. In a consultation paper released last month, the Commission will also look at access to capital for businesses. The paper noted that previous inquiries had revealed that such access was hampered by low levels of competition in the banking sector.
Small business Ombudsman Kate Carnell welcomed the Commission’s review and said her office will be making a submission. Carnell believes capital access remains a big issue with small businesses and will remain a key priority for the Ombudsman’s office – page 6 includes an in-depth interview with Carnell.
According to industry data, there is an estimated $60 billion to $90 billion of unmet lending demand. Providing finance to SMEs was traditionally the domain of banks. But the emergence of marketplace lenders in the small business market has certainly shifted the competitive landscape.
KPMG values the Australian alternative lending market at around US$348 million and is expected to grow. And the big four banks certainly have been growing their market share in the SME sector. Latest data from Morningstar and APRA shows that NAB leads with 21.9 per cent of the business loan market share, followed by CBA (19.5 per cent), Westpac (17.8 per cent) and ANZ (14.5 per cent).
However, what was once perceived as a battleground between banks and alternative lenders, online lending is also emerging as an area open to collaboration. Pollari acknowledges that banks are well-positioned to dominate SME lending given that 40 to 45 per cent of businesses will go to bank in the first instance for their financing needs.
“With that kind of engagement, it is a low-cost mechanism for banks to grow their business,” he said.
Banks have already introduced a number of interesting lending products that provide almost immediate access to capital. NAB QuickBiz’s offering provides online access to loans up to $50 million and the bank just launched a 10-minute account opening option for sole traders.
The bank has also earmarked $56 billion of credit to existing SME customers through the launch of a new pre-assessment tool the bank hopes will facilitate growth and do away with “burdensome” red tape. The Enhanced Lending Application (ELA) tool will provide pre-assessed credit clearance to more than 93,000 business banking customers to simplify and fast-track access to funds as the need arises.
Similarly, Westpac has also made advancements in the SME lending space. The bank remains focused on online lending which has seen applications increasingly grow from this channel over the last six months and provides unsecured loans for businesses that don’t want to use a property as security. Newer products also include an overdraft facility based on conditional approvals.
“It is really about putting the onus on us to change our traditional approaches to banking. Innovation is moving fast with new technologies and disruptors coming into the market. It is important that we innovate ourselves,” Hurdis said.
Customer information and credit scores, however, are a sticking point in the lending debate when it comes to banking. Traditionally businesses need an asset like property as a security against a loan. Carnell calls this “old worldly” given the plethora of data now available and banks seem to be waking up to this challenge.
Addressing SME lending
But partnerships with businesses like Xero – as highlighted earlier - are in a pole position to provide banks with data such as accounting information, helping lenders assess the creditworthiness of a business with the possibility of issuing loans faster.
NAB has been a relative first mover in the area of open application programming interface, giving third parties access to its API. Batchelor talks about the importance of allowing external partners to access the bank’s APIs as important in order to create unique products that meet customer needs.
In fact, she said that NAB was the first bank to drive a two-way data sharing agreement with Xero, a point highlighted by Xero’s Ben Styles. Styles looks after the financial services business for the cloud computing firm including bank partnerships.
With customers consent, Styles believes data such as historic cash flow can be analysed by the bank. In return, small businesses can apply for an unsecured NAB loan of up to $50,000 with no paperwork and see the funds issued within one business day. A similar deal exists in the partnership with marketplace lender Moula.
“By leveraging multiple data sources, banks find they can move as quickly as a fintech. They can access different data points, experiment quickly, and respond to market demand. There’s a strong a case to collaborate, allowing banks to move in real-time and respond to changes in economic conditions,” Styles said.
Westpac has also adopted similar partnerships to help SMEs access lending. Its joint venture with broking platform Valiant Finance – another business supported by Reinventures – allows the bank to refer SME customers “that don’t fit the bank’s criteria”.
“One of our mantra’s is to help businesses become stronger. By referring SMEs that fall out of our bank lending criteria to businesses like Valiant, we can still help those customers grow their business. Problem solved,” Hurdis said.
And it is not just the banks that are playing in the joint venture space as marketplace lenders have also adopted an active approach in the market to better service the needs of their growing SME client base. OnDeck have an agreement with Commonwealth Bank while Prospa inked a similar relationship with Westpac.
Moula has a similar partnership with Xero as noted earlier. OnDeck is also building strong alliances with market-leading players outside of the banking sector such as MYOB, and industry bodies, including the Franchise Council of Australia (FCA) and the Commercial Asset Finance Brokers Association of Australia (CAFBA). “These third-party partnerships have helped us connect with the SME market and carve out our niche,” OnDeck chief executive Cameron Poolman said.
Partnerships and relationships
MYOB, owns a 30 per cent stake in OnDeck Australia and Poolman said it provides a credible link between OnDeck and accountants as well as SMEs using the platform. Earlier this year, the business launched its bespoke product MYOB Loans Powered by OnDeck as a short-term, unsecured loan offering for SMEs. “This partnership delivers strong benefits to the customer, including convenience, service, and a brand that SMEs can trust. In fact, 96 per cent of MYOB clients who used OnDeck said they recalled a great service,” Poolman said.
In May, OnDeck partnered with the FCA to connect with Australia’s growing franchisee market and further strengthened the value of MYOB Loans Powered by OnDeck. “We are working closely with the FCA to fill a serious gap in the market for franchisees and satisfy more of their unsecured lending requirements that go beyond equipment financing to renovation, relocation, and working capital,” he said.
Marketplace lender Capify was the first mover into the Australian market – opening up its business in 2008. Capify managing director John de Bree said the business did eye partnerships with the banks, but found that the sector was reluctant to partner with what they perceived as a new disruptor due to issues around risk and reputation.
“There have been very few global success stories with our industries partnering with banks. If those partnerships work, we would have all known about them,” he said.
Capify, however, has managed to achieve a solid market share in the Australian market and for de Bree, success in this market is attributed to customer commitment and a focus on its value proposition.
“By the end of the day, we are a lender. We lend where banks won’t lend. In doing this, we also help with the cashflow of our customers. Our loans are short-term. We help SMEs grow their businesses because we give them access to capital that they would not have been able to get from the big banks or other traditional sources,” De Bree said. The marketplace lender has also provided its customers with the ability to make daily repayments to help customers with their cash flow by allowing them to make small daily repayments rather than pay a lump sum each month.
You have to ensure that you are always adding value to your customers and you can’t just do that by providing them with only a loan
Capify remains open to joint ventures with like minds particularly as the marketplace lender aims to scale its business and extend its service proposition.
“We are working with strategic partnerships, it’s not about partnering with a big brand name, it is about working with businesses that will help us grow. We have been selective,” he said.
de Bree is looking at expanding the businesses’ product offering and will soon provide access to products such as equipment finance and debt finance through a recent partnership with the listed financial services provider Thorn. The business is also in discussions with other potential partners.
“You have to ensure that you are always adding value to your customers and you can’t just do that by providing them with only a loan. An effective customer retention strategy is done by providing additional products and services,” he said.
Importantly, face-to-face support is also a key strategy for Capify, despite its focus on online lending. “Whilst we can make seamless applications with quicker credit approvals, by the end of day customers want to talk to someone. The average deal size for fintechs is lower and the reason for this is lower customer involvement,” he said.
As a previous business owner, it can be lonely running your business. You need to have people around you to give your support and part of that is a face-to-face banking relationship
It’s an important point given the fact that the key priorities for SMEs in their banking relationships are branch contact and customer service – themes identified earlier. It also highlights that despite the vast digital innovation reshaping banking, SMEs still want traditional bank relationships. Westpac’s Hurdis said it is crucial not to lose sight of face-to-face contact and highlights that the bank is using technology to free up their SME bankers’ administrative constraints to spend more time with their customers.
In fact, Hurdis himself comes from a SME background – his father was a tradie –he ran a bookstore and so understands the needs of SMEs. “Running a small business is a twenty-four hour/seven-day job. There is nothing like having your family’s future on the line. As a previous business owner, it can be lonely running your business. You need to have people around you to give your support and part of that is a face-to-face banking relationship.”