The rise of the fintechs

Part of this is arguably due to lack of competition among the big banks. That same issue has meant the majors have been able to pick and choose customers, whilst barring riskier clients, such as small business owners, from borrowing.

Enter the fintechs – Australia’s newest wave of financiers. These tech-savvy companies began popping up in Australia less than five years ago, but they’ve already shaken up the lending landscape. Put simply, they’ve learned how to streamline the lending process to take on clients that the banks typically won’t.

“The banks’ rationale for not playing in the SME lending space is both risk appetite and profitability. Whereas we’ve solved both those problems,” says Moula CEO Aris Allegos.

Moula was one of the earliest SME lenders to enter Australia’s fintech market in 2015. According to Mr Allegos, at the time there were only two others operating alongside them — Prospa and Capify.

Two years on and there are more than 250 fintechs operating locally, according to a recent Fintech Australia census, including at least 20 in the SME lending space.

On top of that it’s among the fastest-growing fintech markets in the world, with investment in the sector reaching $780 million last year, according to KPMG. Considering that in 2012 investment sat at just $66 million, the numbers are staggering.

The good news is that these fintechs want broker business. Many are actively pushing for more third-party engagement with attractive partnership offers, BDM services, and training.

Defining fintech

If you’re still not exactly sure what a fintech is, you’re not alone. According to the co-CEO of Prospa, Beau Bertoli, that’s because there’s no single universal definition. And on top of that, the category is incredibly broad, covering anything from peer-to-peer lending to international exchange, payments, comparison websites and more.

“In its simplest form, fintech is really a technology-focused solution rather than a legacy-focused solution, to a customer’s financial problem,” he explains.

Like Moula, Prospa was one of the first entrants to the Australian market. Today it’s one of Australia’s fastest growing fintechs and reports a 51 per cent share of the online lending market.

According to Mr Bertoli, their business idea stemmed from wanting to find a way to streamline the lending process for small businesses. The found their answer overseas in the UK and the US markets, where booming fintech industries already existed.

“We set out to build a whole different way of looking at credit to the way Australian banks and other financial institutions did,” Mr Bertoli told SME Adviser. “Creating the financial product is the easy part. It's the technology that can make that product even more appealing or an easier experience for the customer.”

Automated service

Lachlan Heussler, managing director of SME lender Spotcap, says that a defining feature of a fintech is their ability to process data quickly.

“There are a lot of financial service players that have a beautiful shiny website. But once the application has been submitted there’re still hamsters running in the hamster wheel,” he says. As he explains it, a real fintech lender would have the processing work automated.

Moula is unique in that they’ve built their digital processing capabilities from the ground up, rather than licensing someone else’s underwriting. According to Mr Allegos this means they’ve been able to cater it exclusively to the Australian market.

“From a technical perspective, we’re doing all the sort of underwriting and analysis that traditional banks would have done 20 years ago, but in a matter of seconds,” explains Mr Allegos.

SME lending

For too long there were few good options for small businesses looking to refinance. Mr Bertoli says he first noticed the gap in the market through his own experiences as a small business owner.

“A couple of years ago, there was nothing in the Australian market for general working capital or cash flow finance for SMEs,” says Mr Bertoli. “It could take days or even weeks to complete the application, and weeks or months to get an answer. And that’s not good enough for small business owners.”

“We found that there was this movement, especially in the US and UK, to create working capital products for small businesses, where the loans were a bit smaller and where the customer could apply in a really easy manner,” he explains.

Returning to Australia with that knowledge proved a success. In just four and half years Prospa went from very little to writing around 2.5 million in loans, with thousands of partners to distribute.

Ultimately the fintech’s most important point of difference from the banks is that they can take on loans normally considered too risky. According to Mr Allegos, this is because good fintechs have the time, tools and resources to be able to dig deeper into client data.

 “From a profitability perspective, we don't have all the big legacy systems and all the people to run that the banks do,” he says.

Product range

The range of products and services offered by digital lenders has grown in the last couple of years, however there are running themes, says commercial broker Ella Bryan of Springboard Capital.

“What they’re all offering is some form of unsecured loan that’s repaid over a fixed, fairly short period, and with relatively high rates,” says Ms Bryan. She believes the lack of diversification is due to the high regulatory hurdles in the Australian market.

“It’s not a simple regulatory space to broaden out your lending products. And they’re competing against four massive institutions that have cheaper capital and everything stacked against the competitors,” she explains.

Despite the tight lending space, many of the strongest industry players have succeeded by paving out a solid point of difference in the market.

SME lender Capify was among the first to introduce merchant cash advances against future credit card takings; the only product of its kind in Australia. It specifically targets businesses such as restaurants and bars, whose clients primarily make purchases via card payments.

“What we do is purchase their future debit and credit card sales at a discount,” explains Capify’s managing director John De Bree. “Historically, we look at their credit card turnover over six months. And then we'll provide them with funds — for somewhere between three and 15 months,” he explains.

Because the sector is so young, longevity has also become a point of difference, says Capify’s founder and CEO David Goldin. Capify opened offices in Australia in 2008, well before the term fintech was widely known, making it one of the oldest of its kind in Australia.

 “We got caught right in the middle of the GFC, but it gave us some really great experiences. Because anyone can lend money; it’s getting it back that’s the hard part,” says Mr Goldin.

Broker support

In a recent Elite Broker podcast on The Adviser, Sydney broker Tim Werner spoke about his first experience using a fintech (Spotcap) for a client that needed urgent access to capital.

“I lodged the loan on 12pm on the Friday and 12pm on the Monday the approval came through for the client. All on email and electronic,” Mr Werner told The Adviser. “The experience was a real eye opener.”

The fintech-broker relationship may have been tentative in the early days, but a few years later many digital lenders have found brokers to be vital to their business.

According to Mr Allegos, between 40 to 50 per cent of Moula’s business is written through the third-party channel, and they’re expecting that to grow. “We’ve been using brokers since we started, so the relationship’s really important,” says Mr Allegos.

The broking channel also plays a central role at Prospa, who say they’ve invested heavily in the segment since they began partnering with them as early as 2011.

 “We deal with around 4,500 brokers across Australia and we work really closely with a number of aggregators like AFG and Mortgage Choice. So, we see ourselves as finance service partners rather than a threat,” he explains.

Prospa has designed tools that specifically cater to finance brokers who aren't experienced in conducting business online. This includes an easy application service that they can embed into their website, along with an online marketing platform called PUMP that allows brokers to communicate more easily with customers.

“We’ve taken a real partnership approach, and we’re hoping that we can take these finance brokers on a tech journey. So, they too can benefit from all the opportunity that fintech is creating in the Australian market,” he says.

Global online lender Spotcap also has an online application form that brokers can link to their website as well as training options and a dedicated business partner.

“They can log in and simply either refer the customer to us by typing in an email address and hitting send, or they can start to complete the application on behalf of the customer,” says Spotcap’s managing director Lachlan Heussler.

“And then we're developing heaps of cool new products for our brokers to make working with us even easier over time,” adds Mr Heussler.

Changing perceptions

Not everyone is convinced on digital lending. A recent strawpoll survey on The Adviser shows many brokers remain wary of the fintech sector – with almost half of respondents seeing online lenders as a serious or growing threat to them.

But according to Mr Heussler, there’s been a fundamental shift over the last 12 months in how fintechs are perceived, by both the third-party channel and SME borrowers.

“There's been a big number of SMEs willing to use an alternative lending provider, like Spotcap, as opposed to going to their bank,” he says, adding that the third-party sector has started adding alternative lending options to their everyday suite.

In fact, Springboard Capital’s Ms Bryan says she no longer uses the banks at all. “It’s just too hard. They’re too slow, it’s just not for me,” she explains. “I started following fintechs once I saw it was opening up more options for my customers.

“If I’ve got a customer that needs working capital funding within certain parameters, I can talk to my fintech providers and I’ll get an answer within a couple of days. And they’ll have access to funding within a week in most cases. So, the speed is just so dramatically different to the bank environment,” she explains.

For Paul Bevan, finance broker of Dream Financial the situation was the same. Because the major lenders typically require high deposits along with security on a home, it was hard for him to find solutions for SME clients.

“Basically, the banks don’t want to know you,” says Mr Bevan. “Quite often they would insist on referring you to the small business broker in the local branch. But often my client and I would be in two different cities, and they just couldn't get their head around it,” he told SME Adviser.

Comparatively, his fintech experience has been incredibly easy. “In terms of referring clients, and being able to do that online, it’s just a really seamless process. It’s really clear what’s required and what you need to obtain from the client,” says Mr Bevan.

“Take Prospa, for example. They’ll ring the client within minutes of an application in most cases,” he says. “They explain everything really well, in terms of what’s required of documentation and how repayments work,” he says.

The downside

But despite the benefits, not every fintech experience has been a good one, according to Mr Bevan, particularly on the service side of things.

“Some lenders I’ve had dealings with have come up with some algorithms and technology and just seem to expect you to adopt it without providing that level of service that really is required,” he explains.

“We're in a service-based business dealing with clients. They might have the technology that works, but just because they’re a fintech doesn’t mean that they’re a good business. There still needs to be good operators behind the technology,” says Mr Bevan.

Ms Bryan suggests talking to other brokers that have worked with fintechs to get a good idea of what’s out there. “Find one that has a good track record and make sure you really understand the terms properly so that you know what’s best for your customer,” she says.

“Talk to them — they’re all eager to take on new broking relationships. Broking is a very important distribution avenue for most of them. But don’t just talk to one, broaden it out,” adds Ms Bryan.

Looking ahead

One of the biggest predictions for the next couple of years is that we’ll see more consolidation, as additional players continue to enter the market.

“Specifically, in the SME lending space, I’d describe it as busy. In the last couple of years or so, we’ve seen about 20 brands open up in the market,” says Prospa’s Mr Bertoli.

“Australia is just not a big enough market for 20 brands to operate in that way,” he explains. “So I think one of the big things in the next couple of years will be market consolidation.”

“But we encourage competition. We think it’s great to have choices and it challenges everyone to be better at what they’re doing,” he says.

While all signs point to a promising future for Australia’s fintech industry, the increased scrutiny means there’s also a good chance it will become more regulated.

According to Mr Allegos, it’s one of the common questions he’s asked by brokers. “What the ACCC calls fair and misleading contracts,” he says.

“Whether or not the segment does end up getting closely regulated is questionable. Because all of the regulators here, such as ASIC and ACCC, have kind of shied away from consumer lending,” he says.

“But I think it’s incumbent on us lenders to give brokers the comfort that the products we’re putting out are being vetted and we’re being transparent,” he adds.