How non-bank lenders are pivoting amid COVID-19

First home buyers were flooding back into market, house prices were ticking up again, record-low interest rates were driving refinances and lenders – whether secured or unsecured, bank or non-bank – were flush with cash and eager to service borrowers.

The view from where we sit in April is much different. While record-breaking, multibillion-dollar initiatives have been announced to help support lenders in providing cash flow lending to small businesses, it hasn’t been the godsend for all aspects of the market.

The non-bank sector – especially lenders that are heavily reliant on the securities market and funding lines – has been particularly hurting as wholesale funders and investors reduce their risk appetites and, in some cases, pull funding altogether.

The government’s new $15-billion Structured Finance Support Fund (SFSF) will help go some way in ensuring non-bank lenders have access to funding markets, as it invests in primary market securitisations and warehouses financing a broad range of lending in mortgage, consumer and business lending (and looking at collateral beyond residential mortgages, such as asset-backed financing and SME lending). But, already, we are seeing the unsecured non-bank lenders begin pivoting their businesses to keep their doors open.

Much like the global financial crisis, when non-banks suffered from seeing funding lines pulled and risk appetites change, some non-banks are again changing their risk appetites and reducing the products on offer.

SME non-bank lender Capify (Australia) told The Adviser that it is “talking to [its] primary funder in order to sort through the best alternatives for future funding, as most lenders in [this] space are also doing,” and is also “proactively working with [its] existing marketplace lenders and talking to new ones to avail ourselves of funds which will support our customers”.

Capify Australia managing director, John de Bree, noted that while there are still lenders in the market, it “seems to primarily be secured lending solutions”, adding that it has been “difficult for lenders in [this] space to assist with the current government funding schemes”, or offer repayment holidays, as their products rely on daily or weekly repayments. Therefore, capitalising these for six months would have a significant impact on the lenders’ cash flow.

The Capify Australia MD added: “We survived the GFC both here and in our international offices by adjusting our credit criteria and terms. This included shorter terms, not lending to riskier industries, reduced loan amounts, proactively engaging with our customers regularly and supporting them with alternative options, where possible.

“The primary focus [for Capify] of course is still collections, as we needed to work with our customers to continue payments and implement payment arrangements where necessary.  

“As we are not a bank, and our debt solutions are short-term, we are not in a position to offer such things as six months’ moratorium on payments. Hence the importance of regular contact to ensure we are working with our clients through this time,” he said.

As such, the lender is currently focusing its work on providing solutions to brokers and their clients by using its knowledge of the market to partner borrowers with lenders that have the risk appetite for that customer.

Mr de Bree commented: “Capify has some strong established relationships where brokers and customers alike may be able to access a variation of funding solutions and support businesses through this time.”

Looking forward, the Australian MD said that he thought the SFSF could be a “game changer” for the non-bank SME lending industry.

“Capify is committed to supporting SMEs across Australia and will ensure access to government funds are utilised accordingly,” he told The Adviser.

Non-bank fintechs as processing partners

This partnership approach that Capify is taking – working with (rather than competing against) other lenders – is not a new one. During the global financial crisis, Pepper pivoted its business and began offering loan processing for banks. Now, too, fintech lenders are once again shifting their businesses to take advantage of their technological agility and existing business partnerships.

Several fintechs, including Lumi, are looking to emulate what Pepper did in the past – with Lumi CEO Yanir Yakutiel recently calling on banks to partner with them to service loans more efficiently. While the banks are bolstered with large amounts of liquidity from the government, fintechs can provide “the origination, underwriting and servicing capacity, as well as the distribution channels, to reach the SMEs that need the policy loans the most and most urgently,” Mr Yakutiel said.

SME finance marketplace Lend.com.au has echoed this call, stating that it has updated its AI-powered borrower-facing platform for non-bank unsecured business loans to include banks, too.

CEO Bill Baker commented: “If the banks take the approach taken by our non-bank partners, funds can be with SMEs in four days. In a normal market, the application and settlement process for a business loan by the banks may take up to a month. We anticipate that in the current market, the process through to settlement could take twice as long. This is not a reasonable time frame in the current market conditions,” he said.

Given the fact that major banks have already said they are being inundated with loan applications and loan relief requests at the moment, now could be the renaissance of non-bank lenders becoming processing houses for the banking industry.

With the success this had in the past, and the fact that more than a decade of technology evolution has passed since the last crisis took hold, partnerships between the ADI and non-ADI sector like this could be the solution that Australian small businesses (and small-business lenders) need to access finance as quickly as possible – and survive the crisis.

[Related: Banks should partner with fintechs on SME loans: Lumi]