Banks shadow box with online business lenders

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This was published 9 years ago

Banks shadow box with online business lenders

By Shaun Drummond
Updated

Banks are courting a rash of new online lenders that have moved quicker than their giant rivals to use technology to give better deals to small businesses.

Prospa has been quietly building its small business loan book for two years. It is one of several local and international players discussing mutually beneficial deals with banks that have favoured the less risky mortgage sector for years, but are looking for growth in business lending.

Prospa joint chief executives Greg Moshal (left) and Beau Bertoli say they are in discussions with numerous banks about funding and cross-selling partnerships.

Prospa joint chief executives Greg Moshal (left) and Beau Bertoli say they are in discussions with numerous banks about funding and cross-selling partnerships.Credit: Christopher Pearce

"We are having some conversations with a number of the banks and the tier-twos as well," said co-chief executive and major shareholder Beau Bertoli. "They will certainly want to participate from a funding perspective and potentially partnering with a business like ours."

He says they are now in final discussions on a deal with local and international banks.

In common with other new business lenders, the former FlexiGroup sales executive's pitch to banks is that they are not a threat but an opportunity – opening the door for banks to lend more to the 2 million small businesses that frequently don't get loans as they are too risky.

The new players are not generally offering lower rates – often they're equivalent to credit card interest rates – but some, like Prospa will give "risk-based" rates tailored to a business as well as quick approvals that take hours, rather than weeks. Speed is vital when it comes to cash flow.

The key is the use of new systems that can accept real-time feeds of transaction data and credit histories and process an ever rising amount of publicly available data, including social media.

Aris Allegos, the co-founder of Australian online business lender Moula, has been in discussions with all the major banks since late last year. "We are finding there is a bit of two-way conversation," he said. "Some we have approached and some have contacted us."

"We are really frenemies, but the majors are taking a little bit of time to make their assessments, which is understandable."

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After a five month pilot, PayPal will begin offering working capital loans to its 110,000 business users in March. Its total user registrations are up to 6 million in Australia.

Australia and NZ chief executive Jeff Clementz has previously said he is keen to partner with banks rather than compete with them.

"PayPal has met with local banks and other industry stakeholders to discuss a range of partnership opportunities as the program continues to expand," a spokeswoman said.

Offshore rivals include US based OnDeck and Kabbage, ThinCats and Funding Circle out of the United Kingdom. Some are peer to peer lenders – meaning they provide a platform to lend to businesses directly – but many are more like traditional banks. They borrow funds to lend, but have minimal staff, relying on technology to manage risk.

Taking their lead from OnDeck and its deal with Spanish bank BBVA in May 2014, several say the deals would involve banks funding their loans initially, but it could end up as a partnership where the banks refer businesses that are too risky for them. Then once they are big enough the bank partner can take them back, thereby retaining them as a long-term customer.

The amount loaned by the new arrivals is tiny compared with the billions banks lend every year. Moula and PayPal lend up to around $20,000. Prospa goes up to $150,000 online, and up to $250,000 if the borrower contacts Prospa in person. Prospa has loaned around $60 million so far, but with around $20 million in loan applications a month.

Prospa, which is backed by technology from US-based Strategic Funding Source and UK private equity investors, is also using similar distribution networks as the banks, finance brokers and accountants that get an introduction fee to direct clients to its site.

Bank analyst Martin North of Digital Finance Analytics, who conducts a small business banking survey every year, says demand for cash flow loans has risen since the financial crisis because big businesses are tightening up their own working capital and taking longer to pay small businesses.

At the same time in the year to May 2014, 55 per cent of small business loan applications were declined compared with around 18 per cent annually prior to the financial crisis.

Banks have plenty of money they could throw at small business, but despite the higher returns, shareholders wouldn't thank them for jumping into the riskiest sector of the economy when they are making plenty of profit from mortgages and big business.

But Mr Bertoli says banks want to do more with small business. "It is just that they have never had the data insights to lend into this category." Ever reducing margins from a fierce fight over mortgages and regulators looking to reduce growth in housing loans to investors is also shifting their gaze to businesses.

"One [partnership model] could be that this became a product that was embedded and completely labelled as the banks' brand, but the data analytics would be Prospa's. That is a very interesting model for certain banks," he added.

None of the major banks contacted would comment, but several confirmed they were in the early stages of discussions with numerous new business lenders.

Westpac has already taken a stake in retail focused peer-to-peer platform Society One via its venture capital arm Reinventure. Commonwealth Bank appointed a former adviser to the Labor government, Toby Norton Smith in December as its executive manager of strategy – fintech.

Rumours have been circulating that CBA has been approached by OnDeck. But some point out its interest rates are high compared with local offers because they are calibrated to the riskier US market. Rival Kabbage may be a better bet for an international local bank tie up.

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