According to a study conducted by Deloitte, 200,000 Australian SMEs leaders have difficulty accessing capital in order to grow and expand their business. And, as we discussed last time, when small business owners are faced with the daunting task of borrowing money from banks, it can be a stressful and time-consuming process – particularly if they’re newly established. And if businesses don’t have any real estate assets to borrow against, the odds really aren’t sitting in their favour.
This lack of credit flowing to Australian small businesses has created a large underserved market. And naturally, when there’s a gap, new entrants move to fill it. That’s a big reason why Australia has seen a raft of new alternative lenders looking to revolutionise the way finance is provided to consumers and businesses alike.
Australian small businesses have been a major beneficiary of this change as the range of funding alternatives has grown sharply. From unsecured business lenders with clever credit algorithms and super-speedy approval times, to modern invoice finance providers like Earlypay that integrate with online accounting software to make the lives of business owners easier, the banks are struggling to move fast enough to keep these disruptors at bay.
So, why are the banks so slow to respond to these new entrants that are chipping away at all aspects of their business?
Banks are slow moving behemoths
The big banks are simply not set up to be dynamic and here are a few reasons why:
- Many banks are stuck with old and rigid software systems that don't allow for agile new product development. And replacing these legacy banking systems is often such an enormous and risky task that it's easy to find excuses to delay implementation.
- The activities of full-service banks are varied and complex which requires complicated and multi-layered management structures. Decision making and the implementation of ideas is slow as they work their way up and down the chain of command. And guess what? With bureaucracy comes politics and more opportunity for self-interested behaviour so often the best ideas don't see the light of day for the wrong reasons.
- As banks are trusted to look after customer deposits, they are naturally much more regulated than non-banks. This adds more regulatory compliance that needs to be met resulting in reduced flexibility and agility as there are more hoops to jump through.
- Especially after the recent 'Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry', banks are risk averse. They are rightly focused on re-building trust with their customers and getting their houses in order. This shift in focus driven from the top does not leave much room for innovation.
- The leaders of banks are held to account every quarter by shareholders and analysts. As Warren Buffett said, "Show me the incentive and I will show you the outcome." There is little monetary incentive for senior leaders to invest for the long term - they might not survive the short term bumps to reap the long-term benefits.
- If it ain't broke, don't fix it. For decades, banks have happily profited from the cosy oligopoly that is the Australian banking system, (also helped by thirty years of economic prosperity and a surging property market...). After so much success, it's understandable that the senior management of banks might feel that they just need to hold the current course and that these pesky fintechs will never have a material impact on their stronghold. Maybe, maybe not - time will tell.
- The challenge from fintech oriented non-bank lenders is new and unprecedented and dealing with change is tough! Cutting costs by laying people off and closing branches may help the financials in the short-term (and this year's bonus) but the longer innovation is left the greater the hole there will be to fill. It is said that change happens slowly, then all at once and not investing materially in innovation now seems to be a massive risk for Australian banks.
Some of these factors are structural and not much can be done. Others represent opportunities for banks to learn lessons from the success of emerging non-bank fintechs. In our next blog, we'll look at some of the factors helping Australian non-bank lenders grow quickly.