Fintechs plotting a revolution in SME lending
It’s been a long time coming, but New Zealand SMEs looking for business loans are at last starting to see options that don’t involve filling out a 20-page bank form, waiting weeks and putting their home on the line - if they even have one.
The buzzword is 'fintech' - technology companies using digital information to make people’s financial life easier.
It’s not just loans - fintechs are involved in anything from money transfers to investment transactions to budgeting.
But increasingly in countries like Australia and the UK they have been providing unsecured loans to small and medium-sized enterprises wanting funds for expansion or to tide them over cashflow gaps.
Now overseas fintechs are digging in in New Zealand - and some home-grown ones are on the cards.
Last month Prospa, one of Australia’s biggest fintechs lending to SMEs, formally launched in New Zealand. The company is offering loans of $5,000 to $150,000 and makes its decision using a borrower’s digital data to gauge whether its cashflow is enough to keep on top of repayments. It aims to make a decision within 24 hours and doesn’t need a house or other assets as security.
Co-founder Greg Moshal says Prospa has lent A$1 billion to Australian SMEs since the company was founded seven years ago, and uses companies’ existing digital information.
“We connect with various datasets. For example, we might bring in financial information from Xero, a company’s bank statements, or their main transactional account.
“Small business has been under-served in access to capital and we think the problem is huge in the New Zealand market.”
Prospa is not the only fintech looking at New Zealand SME lending - and it’s far from winning the strange name award. Another Aussie fintech, Waddle, is offering pre-approved funds based on a company’s invoice data from its accounting software. And Germany-based Spotcap offers loans up to $250,000 with a 24-hour decision.
MYOB, Xero's main competitor in the online accounting software space, has teamed up with Aussie loan specialist OnDeck to provide SME lending, including in New Zealand.
In Australia, there are also companies like Moula, Capify, and GetCapital. The UK has Zopa, Funding Circle and the modestly-named Rebuilding Society.
And while not a trendy fintech with a wacky name, New Zealand's Heartland Bank offers unsecured lending up to $75,000 through its digital Open for Business (O4B) platform. The company's 2019 first-half report showed lending through O4B grew 56.2 percent in the six months to the end of December to $115.4 million.
It won’t be easy to get SMEs to recognise there’s an alternative to bank lending.
Andy Hamilton, The Icehouse
SME expert Andy Hamilton welcomes the advent of digital, non-bank lenders in the market, particularly given proposals from the Reserve Bank to significantly increase the amount of capital banks have to hold.
Hamilton, who heads Auckland-based business growth centre The Icehouse, says SMEs are worried about access to finance.
“The market for small business lending appears to be contracting with the Reserve Bank changes. It has to be a good thing to have more players in the market, more options, more transparency and visibility. Most SMEs are price takers; this gives them another option.”
Hamilton says fintechs are “vibrating” in New Zealand, but not necessarily achieving scale. And it won’t be easy to get SMEs to recognise there’s an alternative to bank lending.
“The challenge new players here is how they build their business.”
In other markets that's already happening. A survey of 2,000 directors at UK SMEs, carried out by peer-to-peer lender Growth Street, found almost half (49 percent) were interested in non-bank models.
Prospa’s other co-founder, Beau Bertolli, expects New Zealand SMEs to be borrowing $4 billion-$5 billion within 3-4 years and hopes his company will have a chunk of that.
Prospa has appointed a New Zealand general manager, Adrienne Church, and is working with financial service advisors NZ Financial Services Group to get the message out. Church has past form in the non-bank sector when she headed up the local arm of home loans company Resimac.
Bertolli says he and Moshal founded Prospa because they had six small businesses between them and found it tough to get money from banks.
“It is atrocious. It takes a long time; you might have a 10-20 page application form, and you have to get information from your accountant. Then you might wait 2-8 weeks before your application is assessed, and often the answer is no. If they say yes, they need security from the family home.
“You shouldn’t have to tie up a $700,000 home for a $30,000 loan.”
Meanwhile, home-grown fintechs are also set to enter the New Zealand SME finance market, according to Kiwibank’s Anand Ranchord.
Kiwibank sponsors the annual Kiwi Fintech Accelerator, which began in 2017 and works with financial technology startup companies.
Ranchord, Kiwibank lead for the programme, says within the next six months Kiwi fintechs will start to emerge. Momentum could start building within 12-18 months.
“Below the waterline, there is a good hotbed of innovation around fintech, including SME lending. The opportunity is to bring local players to the surface and allow them to grow the market and even head offshore.”
While some fintechs might take the route of funding the loans themselves, Ranchord says Kiwibank sees the opportunity to team up with startup fintechs.
“As a bank we are actively looking for partnerships and we are in discussions with a number of parties.
“Using connections to real-time data is a digital transformation for banking. It’s going to make it easier to make credit decisions in close to real time and it will be cheaper and easier for SMEs.”