Lessons from the UK on alternative lending, AB+F

14 August 2015

The UK's major banks have been legislated to refer small businesses to alternative finance providers if the banks don't want to lend to them, an initiative that Sunil Aranha, the head of Thin Cats Australia, would like to see replicated here.

 Speaking at the AB+F Business Banking Conference, co-hosted with Veda yesterday, Aranha said the UK government saw peer-to-business lending as an important way to help small business access money when they couldn’t get it from the banks.
“We think in the next few months we will have some kind of arrangement with a couple of banks which will refer deals to us that they don’t want to do," he said.
Meantime he is promoting the UK idea to the Minister of Small Business.
He noted that the UK’s move to create a business bank - that lends directly to SME’s through providing lines of credit to alternative finance providers - has seen 100 million pounds made available to small entrepreneurs.
“More work needs to be done in Australia although we are still in the early stages."
Aranha, a former banker with Citigroup and Commonwealth Bank of Australia, earlier this year started his own business as a local licensee of the five-year-old British Thin Cats operation.
But here he is confronting quite a different set of challenges than those faced by the British marketplace lenders.
"The kind of security the banks want is real estate; the kind of security our lenders want is a charge over the business - which is the kind of lending that is done in the US and the UK," he said.
"Australia is probably one of the few markets in the world that lend to business against the home."

Gap in the market

That means if a business fails, Thin Cats has first dibs on assets like inventory or equipment.
"Of course, it’s as not as high quality security as someone’s house, but by the same token it is the way small business lending is done now."
Bank partnerships were a key theme of the conference with John de Bree, chief executive of Capify, saying he had identified a gap in the market five or six years ago and and suggested to the banks that it made sense for them to work together. But he found it was too early for them.
Although he expects strategic relationships between banks and alternative finance providers to flourish at some stage, de Bree didn't hesitate to sign up with Alibaba when it came calling.
The speed with which the Chinese e-commerce giant signed up, after four months of talks, was a real eye opener for him.
"While the banks are starting to talk to disrupters and strategic partnerships will form, in the meantime, companies like Alibaba are moving in fast," he warned.

Liability mismatch

The other main issue highlighted by delegates were the misconceptions about peer-to-peer, or peer-to-business lenders, who some deem to be more risky and more vulnerable than a traditional bank to economic downturns.
It's a commonly held view that the new industry remains untested since it has never suffered through a credit  crisis.
But according to Aranha, the dangers involved in banking are far greater than for online platforms as the latter directly matches lenders and borrowers and also matches the terms.
"The biggest issue for banks today is they borrow short-term money and lend it for the long term and the danger is that they will have money lent out that they can’t get back if someone wants their deposit back," he said.
"We avoid this liability mismatch because we directly match lenders and borrowers."
The plethora of new entrants coming into market did raise questions about how many could be successful in a sustainable and responsible way in a small market when credit growth is still limited.
According to Stephen Porges, executive chairman of DirectMoney, there is a massive opportunity for a lot of new quality platforms to come in, understanding that they will live or die based on the robustness of their credit processes.
For him, being a small operator, allows the ability to be very nimble and he can change the credit processes daily.

"This is very different to trying to change processes within a banking system which can take six months by which time the quality of credit has changed dramatically," he said.