As traditional lenders ration their credit, fintech offerings become increasingly attractive. What advice should an accountant provide to businesses borrowing outside the big banks?
Depending on who you speak to, fintechs are either the answer to the business world’s woes or the at-fault driver in the next money market crash. The high-tech upstarts fill gaps in finance markets, some say. Others argue they operate in the economic equivalent of the Wild West.
Supporters say fintechs have been responsible for introducing the idea of customer experience to a field in which it has been sorely lacking for too many decades. Detractors believe it’s the lack of physical presence, resourcing, experience and regulatory oversight that makes these newcomers so difficult to trust.
Who do we believe? When yet another long-suffering owner of a small-to-medium enterprise (SME) – whose search for credit on appropriate terms in the traditional lending markets has ultimately proved fruitless – asks for advice on fintechs, what should advisers tell them?
“You’ve heard the old saying that nobody in IT was ever fired for recommending IBM,” says Peter Clare CPA, chairman of fintech investment platform Zagga and former CEO of Westpac New Zealand. That attitude was fine at the time, he explains, but what happens when technology moves on, when there are so many more exciting, customisable and flexible options?
It’s the same story with financial services. “I think it’s very easy, as a trusted financial adviser or accountant, to take the easy course, which might be to recommend the client continues to approach large-scale institutions for their credit needs,” Clare says.
“However, given the profound groundswell of change we’re living through, there is now a number of credit providers who have access to funding. I don’t think there should be an issue in using the ecosystem of fintech to determine a client’s needs and identify specific providers.”
Of course, you can never do too much due diligence when making such a recommendation, he adds. Large institutions trade on the fact they have been around for tens or even hundreds of years, while many fintechs have been around for only a few.
Zagga, for instance, has been built with what Clare describes as “industrial-strength risk standards”, including an Australian Credit Licence (ACL), an Australian Financial Services Licence (AFSL) and full compliance with the National Credit Code. It has facilitated a loan book exceeding A$100 million in just over a year from inception.
However, that’s not the case with all fintech businesses, particularly since the Australian Securities and Investments Commission (ASIC) announced the “regulatory sandbox” in which eligible fintechs can test certain services without holding such authorisations.
“At the moment, the fintech sector is virtually unregulated,” says Kate Carnell, Australian Small Business and Family Enterprise Ombudsman (ASBFEO).
Who regulates fintechs?
Carnell’s office, as well as SME advocate theBankDoctor and two organisations representing fintechs, developed and released a Code of Lending Practice. The six biggest fintechs signed it on 1 July 2018 and committed to comply with the code by 1 December 2018. Carnell says, however, there is no enforcement mechanism in place.
“That’s the next phase,” she explains. “In the fintech industry, the 300 or so businesses that exist – the non-signatories – don’t even have a code of lending practice, apart from six of them. They have no complaints mechanisms. They don’t have to be members of an external dispute mechanism such as the Australian Financial Complaints Authority.”
Despite this, according to Clare a fintech’s reputation is paramount in attracting and retaining customers, referrers and advocates. If there is a need for customers to rely on a mandated code of conduct, the fledgling industry will have not delivered on its promise of innovation and service.
“We have our own culture of good conduct at Zagga, of which our people are very proud,” he says. “In our opinion, the complaints process has failed if there is a need for an ombudsman service. Our focus on customer service and transparency should support our customers, especially through any unforeseen difficult times.”
Because many small business owners and their accountants don’t have a clear understanding of fintech, ASBFEO and theBankDoctor have published a guide: Borrowing from fintech lenders: What do I need to know? It outlines loan types and fees, terminology and more. Importantly, it reveals the clear differences between a bank loan and a fintech loan.
The fintech licensing exemption known as the regulatory sandbox is not an anarchic environment but, rather, one in which eligible businesses are given permission to test specific services for up to 12 months. The services can have up to 100 retail clients and be offered without holding an AFSL or ACL, but the business must still meet certain consumer protection conditions.
“ASIC’s fintech licensing exemption reflects our commitment to facilitating innovation in financial services,” says ASIC commissioner John Price.
“ASIC is equally committed to ensuring that innovative products and services are regulated appropriately and promote good consumer outcomes.
“This is the result of balancing the benefits of concept validation testing against the risks of consumer harm from poor conduct by unlicensed businesses that have not demonstrated their competence to deal with consumers. By introducing the fintech licensing exemption, we consider that we have gone as far as we can in balancing facilitation and consumer protection within our regulatory remit.”
Innovative start-ups, Price says, face a triple challenge of speed to market, organisational competency and access to capital. The environment provided by the regulatory sandbox helps reduce red tape, thereby possibly alleviating the first problem. By allowing for a greater number of such businesses it also encourages learning and may lead to increased competency. Reduced testing costs, thanks to reduced red tape and possible faster speed to market, also means the access to capital problem may be eased.
To date, just six fintech businesses have utilised the fintech licensing exemption.
In the meantime, the same rules apply to fintech lenders that apply to banks, Price says. “This is to ensure that the fundamental principles remain the same and there are not bad consumer outcomes, regardless of how technology could be used to assist consumers.”
Like the ombudsman’s office, ASIC has also made information available to educate consumers and advisers, including on its MoneySmart Borrowing Basics and Peer-to-Peer Lending sites.
Questions from an accountant
Accountant Adrian Shiel CPA, a member of CPA Australia’s Victorian SME committee, has worked with financial services brokerage firms and seen some traditional financing products withdrawn from market. He says this means credit can be harder to obtain for consumers and SMEs.
Fintechs can help fill the void if traditional lenders reduce their presence in this space. Even so, Shiel says, this means switching from lenders that are known and generally trusted (despite the findings of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry) to the unknown.
“Our businesses are now exposed to a potentially new level of compliance and risk problems,” he says.
“Do you actually know who profits out of the deal? Do you know who’s lending you that money? Is it securitised? If you’re having a temporary cash flow problem after taking the loan, can you physically go in and talk to them about your situation?”
Is any flexibility possible, Shiel wonders, with a peer-to-peer lending model in which the borrower likely doesn’t know who is providing the funds?
He has no answers to such questions, and that gives him cause for concern, particularly in today’s positive economic environment. What happens when the economy deteriorates?
“We are not in a position where lending is being constrained based on financials,” Shiel explains.
“But if that turns and we see a recession, how do fintech lenders react? Do they suddenly turn the tap off ? How does that affect our macroeconomic environment?
“At the same time, perhaps fintech helps us to avoid a national recession because it opens up the economic environment to lenders from around the world.”
The real problem, of course, is lack of certainty around this new, highly technologised environment. How does an accountant respond when a client asks whether they should consider a fintech lender?
Fintech is another product to toss into the mix, Shiel says. It shouldn’t be avoided, but neither should it be regarded as the only choice.
“Throw it into the risk matrix, read the contract and do a proper analysis. Don’t just assume it’s the same as a bank loan.”
Fintech Australia director Melissa Mack agrees. “Accountants should look for a product that is the right fit and that is in their client’s best interest,” she says.
“Often, that may be about the most affordable provider. In other cases, it could be more about access to credit or cash flow. We have many stories of small businesses that have been able to grow, hire more staff and give opportunities to young job seekers because the online fintech industry has been able to give small business access to credit.”
Clare says it’s important to remember that fintech lending exists because banks are not perceived to be good at servicing unique or unusual requests, such as from specialised industries. It does not exist to deliver credit and other financial services to “average” borrowers.
“If you’re dealing with a young, married couple who both have PAYG [pay-as-you-go] jobs, who earn an average income and who have saved a 20 per cent deposit for their first home, going to a mainstream bank is a great idea,” Clare believes.
“Bank products are designed around that absolutely average situation. As soon as you come away from average, dealing with those larger organisations becomes far more complex.
“We are smaller, but we care about customer experience. We’re far better able to tailor our response. Just do your due diligence, look at who’s involved in the business from a board and management perspective and proactively ask for a list of clients who are happy to talk about their experience. Once you’re happy, take a small step – don’t risk the clients’ entire business.”
Fintech Australia director Melissa Mack
How healthy is fintech in Australia?
The opportunity for fintech in Australia is huge. Reform such as comprehensive credit reporting and the introduction of open banking will open the door for a new breed of fintech, using data to create better customer outcomes. As a whole, fintech is a high-growth industry.
How much of fintech involves lending?
According to the EY Fintech Australia Census , 19 per cent of Australian fintechs are lenders.
Is there a lack of fintech regulation?
There are many companies that fall under the umbrella of fintech lenders. Many, like marketplace and unsecured personal loan providers, are regulated by ASIC and have relevant credit licences. In this way, [they] are subject to the same scrutiny and standards as a bank. There are also lenders that fall outside the traditional regulatory landscape.
Earlier this year Fintech Australia supported a new AFIA [Australian Finance Industry Association] online small business lenders’ code of lending practice outlining best-practice principles for balance sheet SME lenders.
What advantages do fintech lenders have over banks?
Many fintech founders have come directly from banking and finance backgrounds, taking key experience from what they couldn’t do in traditional lending. Where fintech has an advantage is that with smaller, more agile business models, it [can] adapt and change as the market does in a way that is difficult for legacy businesses.
Fintechs: small business lenders fill a market gap