Can small business make it out of the banking too hard basket?

According to the RBA, Australian SMEs represent about 95 per cent of the over 2 million actively trading businesses in Australia.  In total, they are considered to account for 68 percent of all industry employment and 56 percent of industry gross value added.

68 percent is heady stuff, and when it comes to negotiating power with suppliers, more often than not, volume talks.  No more so when it comes to financial products.  Yet despite this, further research from the RBA indicates that since the GFC, the average spread on small business loans has nearly doubled.  Banks argue this accounts for better risk pricing, which potentially was flakey in the lead up to the financial crisis.  SMEs argue it’s profiteering, citing bank super profits and a reluctance to pass through interest rate cuts.  While it’s hard to tease out who’s right from who’s wrong, one thing is for certain – SMEs are hurting.

But where there are decent spreads, decent profits follow, not to mention the opportunity for competition.  Non-bank startups are getting in on the SME lending game fast.  Local outfits ThinCats and MoneyPlace lead the Australian peer to peer lending pack, while companies like InvoiceBid are transforming the invoice financing sector using similar marketplace dynamics.

And while companies like these are providing smarter, cheaper and better credit and financing options, it’s questionable as to whether they will be enough to force systemic change in how the wider finance sector evaluates and prices small business lending risk.  If large financial institutions continue to be slow to come to the table – after all, housing still offers one of the most profitable returns for banks – is it time for Australia to re-evaluate the role of the state?

The British Business Bank

Well, in Britain, they’ve done just that, establishing the British Business Bank in an effort to turn the tide on deteriorating success rates when it comes to small businesses securing finance.  Between Quarter 3, 2012 and Quarter 4, 2013, 53 percent of sole trader businesses in the UK who applied for a loan were declined funding.  This was compared to 9 percent of businesses with 50-249 employees.  With lending returns fairly fixed over the course of a loan’s lifetime, increased costs in assessing small business credit-worthiness meant it was irrational for an investor return focused bank to favour lending to the sector.

Small business was finding itself in the banking too hard basket, much to the concern of the government, who were desperately looking to “rebalance the UK economy away from Government spending and consumption towards more business investment and sustainable growth”.  Something had to give, and it certainly didn’t look like it would be the profits of the majors.

Yet instead of toeing the line of a traditional bank and doling out loans directly, the newly formed British Business Bank opted to put their billions to work in the emerging small business finance market place.  By partnering with start-up funding providers, business angels, peer to peer lenders, supply-chain finance lenders and many more small business finance experts, the British Business Bank have now helped 30,000 small businesses access finance.  By catalysing the market, rather than replacing it, as they state in their annual report, they hope to attract £2 – £3 of private sector investment, for every £1 of Business Bank funding.  Their next step is to pass legislation that will ensure loans rejected by the major banks are automatically referred to its network of alternative finance providers.  It’s a small finance outfit’s lead generation utopia, and it’s bound to get banks upping their game – no one likes handing business to their competitors.  At the end of the day, it’s a win-win for small business, the economy, and Britannia.

Kiwibank

Across the ditch, banking is also a little rosier for the customers of state owned bank Kiwibank.  Topping the polls for customer satisfaction in a recent survey, it would appear consumers and businesses are willing to put their money and their custom with a local provider who claims to have the nation’s best interests at heart.  Kiwibank’s vision is to be:

“A Kiwi bank for New Zealand” i.e. to become a significant, self-sustaining bank, firmly committed to delivering long-term value for our customers, our shareholder and our country.”

Kiwibank is a 12 year success story that leveraged NZ Post outlets to create an almost overnight network of banking branches across the country.  Profit after tax for Kiwibank came in at $100 million for the year ending June 2014.  In comparison, Australia Post is losing money hand over fist.

And contrary to most Australian banks, who scrape along at less than 10 percent common equity tier-one capital, Kiwibank’s customer funding is the highest among the major banks in New Zealand, with approximately 81 percent of its funding coming from deposits.

Emboldened by a maverick attitude and patriotic call for independence, Kiwibank have found a stronghold in the hearts of the nation, that not even the major Australian banks, who make up their competitors, can touch.  Their latest Indepen-dance campaign demonstrates some of their spirit.

So perhaps it is time for Australia to start a mature and bipartisan conversation around state involvement in small business banking.  If New Zealand and Mother Britannia can do it, why can’t we?  Small business banking is complex.  It’s fraught with uncertainty and risk.  But it also provides some of the biggest opportunities for Australia in the wake of the mining boom in terms of continued prosperity.  And that’s what makes it one of the most exciting banking and social challenges to face not only our nation, but the world.

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