Reducing barriers to new challenger banks help improve access to finance for SMEs

Bank barrier

Government moves to reduce regulatory barriers to challenger banks entering the market should improve access to finance for small business, according to Australian Small Business and Family Enterprise Ombudsman (ASBFEO). 

The Ombudsman, Kate Carnell, welcomed news that the Treasury is consulting on proposed changes to the Banking Act, which would remove restrictions on the use of the term ‘bank’.

“[This] should enable more industry participants to compete with established institutions and make it easier for small business operators to borrow funds,” she said.

“The power and control of the established banks remains a barrier for small businesses seeking capital to start or expand their operations,” the Ombudsman said. “Another barrier is a general requirement by the major banks for bricks-and-mortar security.

“Unless a small business is able to meet this requirement, often by using a business owner’s home as security, they have few options to obtain finance.

“Many young people do not own a home or have limited equity in their home, and therefore struggle to borrow to start or expand a business.”

Carnell noted the Australian Prudential Regulatory Authority’s guidelines currently require “banks” to hold at least $50 million in Tier 1 capital.

“APRA will need to review its guidelines for minimum capital requirements if new entrants are to compete equally with the major banks,” she said.

Jamie Osborn, CEO of fintech lender GetCapital said the Ombudsman is ‘spot on’ in her views and that government moves to reduce regulatory barriers for new challenger banks is good policy and good for small business – “if done right”.

“Reducing regulatory hurdles that encourage Challenger Banks will lead to more options for small business and creates the best chance of adding liquidity to segments of the market where supply and demand imbalances exist,” he told Dynamic Business.

“The UK market offers a great precedent here as it relaxed its requirements for new Banking licenses 4 years ago,” he said. “Since then, it has added 14 new banks and importantly none of the new entrants have launched ‘traditional’ bank offerings. Instead, they have targeted under-served niches in the market, such as small business lending.

“Aldermore and Shawbrook are two such examples in the UK – both are new Challenger Banks created following the relaxation of new Bank licensing in the UK.  Each of these Banks targets segments within the SME market that are under-served by the traditional lenders and both now have multi-billion pound loan books.”

Osborn said Australia currently has one of the most concentrated banking markets, with the top five banks accounting for over 80% of the market share.

“Compare that to USA, where the top banks account for approximately 50% or to Germany, where they account for 35%,” he said. “When you have a concentrated market, small changes in market conditions or regulation can have big impacts on the supply of credit, especially in segments of the market that the Banks see as non-core.  The results of the recently completed Small Business Credit Survey suggest that small business is one of those segments. The search costs are high and credit supply is low.”

Related: Inability amongst Aussie SMEs to access credit ‘deepens’ economic downturns, slows recovery.