Nonbanks poised to poach banks’ prime customers

by Madison Utley13 Sep 2019

Speaking to the rise of nonbank lending, the founding director of a commercial brokerage believes “banks need to be careful they don’t lose their relevance in the market.”

Recent research has indicated that alternative lenders may pass traditional banks as the key funders in Australia by as soon as the second half of 2020.

“As nonbank lenders build up their experience, they’re becoming more competitive because they’re starting to get a return on investment. And as they become more proficient, they’ll scale up and they could become more prime competitive while maintaining all the really positive characteristics that the banks don’t have,” explained Ian Robinson of Robinson Sewell Partners.

“I think they could end up stealing a lot of banks’ primary business.”

The speed at which nonbanks operate is a key selling point, especially as compared to the “almost dysfunctional” speed to market capability of banks. 

“Even on the larger end of a commercial transaction, where it’s custom designed and the due diligence is still very similar to what the banks do, they just do it so much faster,” said Robinson.

Having yet to fully mature, nonbanks are able to flex, expand and meet the needs of the borrowers as they become apparent.

For example, data has shown that the requirement of providing property as security against new loans is one of the most widespread frustrations in the SME sector.

Initially, nonbank lenders were only able to offer cashflow loans for businesses taking out small loans.

“Now, there are lenders out there that can do up to $50m or $100m in a loan that’s purely cashflow lending as well, without relying on brick and mortar,” said Robinson.

“That’s where a lot of the banks’ experience has been lost. They’ve relied so much on security, they don’t understand the financial modelling of a business. They say they do, but there’s quite a lot of naivete in their credit risk assessment.

“Some of their policies determining bankability is based on rudimentary ratios. It’s one ratio fits all, without actually looking at the industry, the business they’re in, the risk mitigation the business has got.”

Given the escalation in regulation following the royal commission, there’s been discussion around if similar intervention might creep into the nonbank space and stifle its growth.

“There’s so much litigation going on at the banking level, I’d think resources are likely going to be tied up there for years before they even start thinking about non-ADIs,” said Robinson.