Fintechs in the Australian marketplace: threat or enabler?

Editorial Board Member, Michael Wood, Head of Trade & Working Capital Product Management at National Australia Bank, describes why Fintechs in the Australian marketplace are either threat or enabler.

Fintechs offering working capital finance and associated solutions in the Australian marketplace come in many shapes and sizes. They are numerous today and their numbers seem to grow with each passing week. Presenting as lenders of convenience, the fintech lending community is emerging as an alternative to the banks as a source of funding. The marketing materials employed by the fintech lenders serve to highlight the potential weaknesses of the current engagement models employed by banks, with fintechs presenting the ability to provide almost immediate access to credit decisions and flexible solutions. Quick credit decisions are enabled by online engagement often linking directly to accounting platforms and bank account information, leveraging the use of data about the borrower and its directors as well as about the industry and ecosystem in which the business operates. Flexibility is provided through an appetite to allow customers to access more money as they require it and without the need to provide personal assets as security.

For me, as a product manager within one of Australia’s “big 4 banks”, the Fintech community presents as a disruption. The question though is whether the disruption should be seen as a threat or an enabler. Maybe it is both.

Undoubtedly the ability to approve lines of credit for small business in a matter of hours rather weeks sets a new benchmark for banks that have built a legacy of robust credit risk management facilitated by time consuming processes. Banks are notorious for credit processes that involve too many customer meetings and multiple requests for information. When the same information is asked for again either because a different department needs the information for a different use or because so much time has passed the bank needs “fresh information”, the marketing material employed by fintechs seems quite reasonable.

The appetite of fintechs to provide working capital facilities secured by the assets of the small business, without the “unholy co-mingling” of owner and director’s personal assets, challenges the banking community’s propensity to set lending limits as a function of (admittedly among other things) security values. Fintechs are pointing out to customers that banks, at least by perception, have grown used to doing business on terms favouring the Bank and not fully reflecting the needs or wants of the borrower.

So fintechs are a threat, and the threat is to the traditional way banks have operated and made credit decisions. To say though that fintechs are threat to the ability of banks to remain at the forefront of the business growth enablement belies the desire and ability of banks to respond.

A broader political and market shift in Australia reflects the importance of small businesses in the economy and an acknowledged requirement for banks to support small businesses. In short banks are being encouraged to support small business through easy to understand and fairly constructed facilities. Whilst that is a discussion in itself, the discussion takes on added relevance when held in an environment that considers the smorgasbord of bank and non-bank (including fintech) lenders with different degrees of regulatory oversight applying to different participants.

The banks want to respond. A casual observation of the major banks (including the one that pays me) reveals the intention to respond. Within the walls of the banks, conversations are littered with words such as “ideation”, “innovation hub”, “collaboration”, “pain points” and “journeys”. The language reflects a cultural shift in how banks are thinking about customers and their needs. That many of these conversations involve potential external partners, including the fintechs that otherwise might be seen as a threat, reveals that banks are exploring different ways to solve for the customer needs that are being uncovered through customer conversations. For NAB, the QuickBiz unsecured business loan that provides access to instant on-line credit decisioning with funding within one business day is a showcase example of what is possible. The QuickBiz product was delivered in 14 weeks showing the value of investment by banks in the various innovation hubs they have respectively set up. Such rapid product development might be attributed in part at least to the shift in the traditional market place dynamics influenced by the emergence of a fintech community.

The fintech presence is also enabling banks to more clearly see some customer needs. Businesses now have available alternatives when negotiating with banks. The goal of a business purpose loan without the need to place personal assets at risk is demonstrated to be reasonable by virtue of the outside alternative provided by the fintech. Accordingly, fintechs might be thought to be accelerating the change in the way banks respond to the lending requests presented by customers.

The variety of fintech offerings that leverage trade receivables as a basis for lending points to trade receivable finance as a battleground for participants in the market. The trade receivable finance market might be expected to grow with more players and importantly with more means by which small business owners are made aware of the potential to leverage receivables as a source of cashflow finance.  The environment looks like a classic case of coopetition. For banks to play in this marketplace there is a need to be willing to compare the bank and fintech offerings and for banks to evolve their proposition. This might see banks build out their own offering. It might also involve partnering strategies so the bank can facilitate customer access to solutions provided by either the bank or a partner. Regardless of what form innovation might take, the fintech presence serves to raise the profile of trade receivable finance solutions as a strategically important means by which banks can support their customers.

In answering the question of whether fintechs are disruptors or enablers, the answer for me is both. They are serving as a positive disruptor to the way banks have looked at credit decisions, lending product structures and even product design and development activity. The fintechs are providing the fuel for banks to behave differently. For the trade receivable finance market, fintechs are helping lift business customer awareness of what is available and so can be considered to be helping drive a greater level of product and solution development in the space. Ultimately that means more choices for customers and a healthier market place in which fintechs and banks alike can participate.