New SME lending platforms could tap significant unmet demand

If the major banks adopt the credit assessment systems being used by PayPal and other innovators they could "grow the pie" in SME lending by as much as nine per cent, according to new research.

Macquarie Securities and RFi have issued a joint report on the small to medium business finance sector, attempting to assess the impact of new lending platforms on the market and particularly on the big banks.

According to Macquarie and RFi the use of real-time monitoring capabilities built into new lending platforms would allow the big banks to offer more cashflow lending products, as opposed to the secured lending that is the basis of their SME business currently.

PayPal is using this type of system to support its SME loan product, Working Capital, which was launched in Australia last October. Finance is available to merchants that have operated a PayPal account for at least 12 months. PayPal can monitor the merchant's cashflow position by following their PayPal sales history.

Macquarie and RFi said similar systems were being used in the United States by online SME lenders, such as Kabbage. Kabbage asks the borrower to provide it with links to its business activity on payment services such as PayPal, eBay, Square, Stripe, Xero and Intuit.

The report lists 13 online SME lenders in the US - all using variations on the Kabbage and PayPal approach and all taking advantage of the conservatism of the US banks. Between 2011 and 2014, online lender OnDeck's loan origination grew at a compound annual growth rate of 135 per cent.

Macquarie and RFi said: "These systems allow for real-time monitoring of cashflows. The fundamental proposition of new tech lenders centres on being able to use thousands of near-real-time data points to automatically assess credit applications."

The new systems also allow for daily cash remittances and repayment directly from merchant accounts. Credit can be extended on the daily amount of sales and can be adjusted in line with changing circumstances.

And tech platforms will help banks lower costs, given the highly automated nature of the application, assessment and underwriting processes.

Macquarie and RFi's view is that new approaches are required for the big banks to expand the SME segment.

The report said: "Our banks are overly conservative when it comes to business lending, requiring security in most instances. This has resulted in a heavy skew towards asset-rich industries that is not necessarily aligned with activity in the economy, where services continue to play a bigger part."

Macquarie and RFi said that Commonwealth Bank had the most to gain from adopting such a strategy. They estimated its "main bank" share of business with less than A$10 million of annual turnover at 29 per cent, with the other three banks' shares around 15 per cent to 20 per cent.

CBA "punches under its weight" in several SME product categories. By innovating in SME lending the bank could increase its share of wallet.

They also favour CBA because it is the sector's technology leader.

They said Westpac was below its "natural market share" in cash flow lending as a result of a conservative approach to business lending. It also stood to gain substantially from adopting new approaches to SME lending.

The report said that if Australia followed the US trend, the amount of unmet demand for SME finance that could be tapped by new approaches could be as much as $70 billion - equal to a nine per cent increase in system business credit.