Bruce Billson endorses disruptive online SME lenders
Minister for Small Business Bruce Billson says the government will not stand in the way of fintech that is lifting competition in the banking sector. Chris Hopkins
Bruce Billson endorses disruptive online SME lenders
by James Eyers Aug 30 2015 at 9:07 PM, Financial Review afr.com
The Minister for Small Business Bruce Billson has backed a flurry of new online lenders targeting small and medium businesses to pressure the big banks to extend more credit to the often ignored sector.
Mr Billson gave a ringing endorsement of the fintech start-ups’ ability to stir the forces of banking competition, after the big banks were stung by criticism at the National Reform Summit last Wednesday.
Australian Chamber of Commerce and Industry chief Kate Carnell pointed to access to capital from the big banks as a hindrance holding small business back. Ms Carnell said big banks were typically requiring mortgage security to be pledged for small business loans or otherwise providing credit cards with high interest rates. Alternative funding sources such as those from crowdfunding and other online lenders must be supported by the government, she told the summit.
Mr Billson agreed.
In an interview with Fairfax Media, he said: “One of the challenges that small businesses have faced is that the traditional big banks have tended to want coverage by a house or some other personal asset or guarantee to be prepared to make a facility available.
“But we are seeing the emergence through fintech and other models of new avenues for funding whether it be P2P [peer to peer], or crowd sourced equity funding. The new participants coming in offering different kinds of financing is very welcome. It has also shaken the tree of the big banks.
“We are making sure that nothing government is doing is standing in the way of the fintech revolution and new avenues of finance that may better meet the needs of smaller enterprises.”
Mr Billson’s parliamentary colleague Arthur Sinodinos attended the launch last Tuesday night of Stone & Chalk, a fintech hub in Sydney that will house 200 entrepreneurs by the end for the year. One of them is Spotcap, an online lender based in Berlin that has raised €18 million ($28 million) of equity and debt to date and is speaking to various counterparties in Australia about establishing finance facilities in Australian dollars to fund the growth of a local loan book.
Spotcap, which has been operating for two months in Australia, is offering a six-month credit line product up to $150,000 at interest rates starting at 0.5 per cent a month and averaging 1.5 to 2 per cent a month.
THE OXYGEN OF ENTERPRISE
The application process for the cash flow loans is 100 per cent online with each credit facility risk priced using a proprietary credit algorithm. Also unlike the big banks, the credit line is completely unsecured.
“Spotcap Australia has issued more than $1 million worth of credit to SMEs in its first 60 days of operation, which has exceeded our expectations and validates to us that there is significant demand for our credit line product from small businesses in Australia” said Lachlan Heussler, the company’s managing director in Australia.
Mr Billson said fintech start-ups are bringing a newly found culture of entrepreneurship to the economy that will be crucial for its future growth.
“The disrupters have shown there are other avenues to access finance, which is the oxygen of enterprise and if you starve it off that has a real impact on growth and economic opportunities,” he said.
“Fintech is really shaking the tree. I am saying to the big banks that if they want to continue to be an ally and partner in the small business community, you need to embrace these new offerings – and some are. That is an area of contest between the new offerings and the big banks and small business can only benefit from that.”
Australia’s two million small to medium enterprises [SMEs] employ almost 70 per cent of the workforce – 4.5 million people – and account for over half of the output of the private sector, producing more than $340 billion of the nation’s economic output each year.
According to a submission to financial system inquiry by the Australian Centre for Financial Studies, banks are requiring more security on SME loans. “For younger business owners, increased reliance on collateral can present a significant barrier.”
It pointed to the rising cost of housing which meant many younger entrepreneurs didn’t have a property to pledge. It also called out the Basel banking regulations that require banks to hold more equity against business lending compared to home loans, which has resulted in the majority of big bank assets being mortgages.
HAPPY TO LEND CONDITIONAL
Ms Carnell said it was understandable that banks wanted to minimise risk and maximise return on equity but “we went through the National Reform Summit where many comments were made about generating growth and productivity and innovation – which requires entrepreneurs growing and employing. That is all true, but none of it will happen if we have an environment where small business is not able to borrow. It seems like we skirt that issue a bit. The banks say there are no problems, of course they are willing to lend. Well, they are, but only when you can offer them a house.”
She called for light touch crowdfunding legislation to be introduced soon. She also encouraged alternative lenders to talk to SMEs about their offerings.
Spotcap’s entry to the Australian small business online market market follows PayPal, Prospa, OnDeck, Kikka, Moula and ThinCats. Moula in June secured a $30 million funding deal with non-conforming lender Liberty Financial.
Mr Billson said he was disappointed that start-up entrepreneurs were not represented at the National Reform Summit last week. “I would have liked to see a greater focus on the entrepreneurial ecosystem in our economy,” he said.
“I wish there were more of the disrupters, the entrepreneurs, the enterprising men and women creating new businesses and new concepts of value for consumers, those using technology to disrupt the established economy to create the kind of enterprise culture we need for the future.
“That has got to be front and centre. We have to make sure those business ideas take hold and grow in Australia and aren’t enchanted to go to some other jurisdiction where the tax rate and policy settings might be more delightful than there are here.”
Know your ThinCats from your RateSetter: a guide to peer-to-peer lending
Know your ThinCats from your RateSetter: a guide to peer-to-peer lending
BRW – 24 August 2015 13:43
With bank deposit rates at all time lows, rates in the range of 8 per cent to 15 per cent on offer from P2P platforms certainly look attractive. However, these two are definitely not equivalent investment options.
Currently most people who lend via P2P platforms fit the sophisticated investor category (net assets of $2.5m or gross income of $250k) but providers such as RateSetter, DirectMoney and the soon-to-launch MoneyPlace accept funds from investors who don’t meet these thresholds. Whether you are a sophisticated or retail investor, you need to know exactly what you are getting into when lending via a P2P platform and what makes this challenging is that they are all different.
With RateSetter, retail investors say how much money they want to lend, what term they wish to lend for and the interest rate they are happy to receive. Then RateSetter matches the lender with borrowers. You wont know the identity of the borrower, rather you rely on RateSetter’s system that automatically matches your funds to approved borrowers. RateSetter charges a fee of 10 per cent on the interest you earn.
DirectMoney is more of a hybrid of a P2P lender and a fund investing in loans, where retail investors’ funds are pooled to finance a portfolio of loans. DirectMoney approves and funds loans and after about one month these loans are packaged up and refinanced by monies deposited in the fund by retail investors. DirectMoney charges the fund (which means the investors) a management fee of 1.925% pa plus an administration fee of 1.1% on the fund’s assets.
Society One (which is part-owned by Westpac) currently only caters for sophisticated investors although it expects to enter the retail market soon. Society One allocates interests in unsecured personal loans according to a mandate given by the investor. The mandate is based on the investor’s preference re term and risk grade of loan. It targets rates of return between 8 per cent and 9.5 per cent and works on a default rate of 2 per cent to 3.5 per cent. Fees are charged to borrowers but not investors.
The MoneyPlace model is similar to Society One’s but when it launches next month it will also be open to retail investors.
ThinCats is another P2P that only accepts funds from sophisticated investors. With this model investors select the borrower they want to lend to based on comprehensive information posted on the platform. As this is an individually matched platform, this kind of investing requires a higher level of confidence in your ability to make lending decisions based on information provided. ThinCats is intending to introduce a charge of 5% on the interest you earn.
The big challenge in comparing the different P2P models is working out which one best suits your risk profile and personal preferences. So what are the risks and how are the different players trying to mitigate them?
Despite some excellent technology that enables P2Ps to assess the creditworthiness of borrowers, it is still too early to say that any P2P has established a strong credit risk track record. One thing for sure is that when you lend to or via a P2P you wear the risk of borrowers not repaying. Remember too that the vast majority of P2P loans are unsecured, so if a borrower can’t pay the principle of “you can’t get blood out of a stone” applies.
One way to mitigate the risk of lending to a borrower who goes bust is to invest in a portfolio of loans so if one does go bad you don’t get wiped out. This is likely to require more time and skill in managing and monitoring much the same as with a share portfolio. Society One, ThinCats and MoneyPlace offer fractionalised loans to achieve this portfolio effect. Here you invest in fractions of multiple loans, rather than being concentrated in a single loan.
Another way to mitigate credit risk is to invest in a fund like the DirectMoney fund. This means everyone shares proportionately in losses although you wont have the line of sight on the underlying exposure as you would if you were matched directly with borrowers.
RateSetter adopts a different approach that could provide protection for lenders who get caught by a bad debt. It has a Provision Fund raised from borrowers, which can be used to compensate a lender in the event of a default. But this is not a guarantee and it’s entirely up to RateSetter as to whether they pay out.
The P2P sector is still relatively new and is heavily based on technology, making it fertile ground for cyber crooks. No P2P can guarantee their model is bulletproof and in time some will prove to be better than others. A P2P concerned about its reputation might be willing to reimburse investors if they are caught by fraud but we still don’t know how this might pan out.
Credit risk and fraud can be mitigated by the portfolio approach and fractionalisation but if the P2P’s risk assessment and monitoring systems are not sufficiently robust in the first place, investors pay the price. Some players use systems that have been in operation in other jurisdictions where default rates range from 2 per cent to 8 per cent but only time will tell what the Australian experience will be.
BANKRUPTCY OR INSOLVENCY RISK
In the unlikely event that an Australian bank goes bust, depositors are covered up to $250,000 by the Government’s deposit guarantee scheme. P2P lenders are not Authorised Deposit-taking Institutions under the Banking Act and accordingly are not covered by this scheme. Most P2Ps have yet to become profitable although some have backers with deep pockets who may be willing or able to come to their rescue. If a P2P were to become insolvent, who would continue to maintain the platform to recover your investment? Most providers have some form of arrangement in place but again we just don’t know how this might unfold.
When you invest via a P2P platform your funds will be tied up for the term you stipulate. Some providers talk about the development of a secondary market in P2P loans, but for now you should work on the assumption that this will remain an illiquid investment.
ASIC’s strategic priorities are to promote investor and financial consumer trust and confidence to ensure a fair, orderly and transparent market exists. In a recent speech ASIC Commissioner Greg Tanzer stressed the need for transparency and disclosure. He said “promotional materials for a P2P product should not inappropriately compare the product to a traditional banking product”. Arguably any comparison at all with traditional banking products is “inappropriate”. It might be worthwhile for the Commissioner to clarify what is meant by this word and also for industry participants to ensure they comply with the letter and intent of ASIC’s guidelines.
Industry participants also have a role to play in establishing and maintaining acceptable standards. Stuart Stoyan, CEO of MoneyPlace, said “our biggest fear is a major failure by a P2P lender, or a company claiming to be one, that causes ASIC or another agency to come in and say ‘we’re shutting this down’.
The P2P model has much to offer borrowers and lenders and it would be unfortunate if its undoubted potential was hampered by this fear becoming a reality.
So if you are thinking of investing via a P2P platform here are four tips:
1.Work out how much time and effort you are prepared and able to commit.
2.Read the PDS thoroughly and if there is anything at all you don’t understand seek professional advice.
3.Do your homework on the people backing your P2P.
4.And remember the higher the return the higher the risk.
Neil Slonim is a business banking advisor and commentator and is the founder of theBankDoctor.org the world’s only not-for-profit online source of independent SME banking advice.