If you’ve been following the financial news in the last week you may have come across a proposal for a Government backed lender to provide funding for small and medium enterprises (SMEs). If you’re that keen, you can read about the story here.
This is an issue I’ve been harping on about for some time and raised the prospect of a State Bank type of organization back in December 2016. That story received a lot of feedback and ridicule (most of it privately).
Some of the arguments against a State Bank (back then) made a lot of sense. But the reality is that many SME’s are still starved of funding particularly those without the ability to provide property as security.
I also suspect that now that the banks are starting to pull their heads in with regards to mortgages, they will loosen the credit criteria for SME lending…to a point. They will also not want a Government backed competitor with access to cheaper funding to play in the same pool as them.
Whilst every single politician in my life time has said the only thing that will reduce bank rates and increase competition is more banks none of them (except Keating) have ever done anything about it. Keating let in 16 foreign banks and none of them were able to compete at a retail level with the local majors.
Whilst I would love to rant and rave about the reasons why they all failed, the main reason is that we just don’t have the population to support that many banks. So, unless you support tremendous population growth, stop whinging about our banks. Those two disparate issues go hand in hand.
Lack of population is the reason why Australia is such an oligopolist society. We have two supermarkets, four major banks, one main hardware chain (anyone remember Masters), two (sometimes three) airlines. The list goes on and on. We don’t even refine our own petroleum anymore.
The main reason is that we have less people on a land mass roughly the size of the USA then they do in LA.
Now for the good news. We all keep reading about disruptors that are tech based. Amazon has managed to make some inroads without even having a presence in the country. There will be many others.
The key competition to banks will not come from the traditional financial sector in the coming years. It will come from the tech sector. Look how ferociously our banks fought against the introduction of Apple Pay.
And this is just the payments system. The home, business, corporate, institutional loan segments of banks are a whole different kettle of fish.
Right now, trying to get a loan involves many different disciplines of professional work (namely, credit risk analysis, accounting, processing, documentation, legal, compliance etc). That’s why most people just give up and go straight to a mortgage broker.
Any disruption to this segment will require pretty serious software. Then you have to explain it to the individuals.
Business lending is even more complicated. Machines can’t make the grey area decisions that humans can. Their processing is binary (literally). The response from a computer is as good as the data input into it. Computers don’t understand passion, nuance, experience, drive, heart, honesty, dishonesty, compassion and many other human inputs that go into making a credit decision. Yet.
As for a Government backed lender, I can’t see it happening. I hope I’m wrong but we need a change of Government before it’s even considered. By then, the banks will have made a small nod towards the SME sector. Probably, just enough to avert a full blown competitor cut their lunch. We’re already starting to see the beginnings of this this week.
If you don’t believe me just have a look at the strategy deployed in other oligopolies. For example, the airline industry:
Every time governments start taking high speed rail seriously, the airlines reduce their domestic airfares and thus make the financial models for high speed rail uneconomic.
Hopefully, just talking about a Government backed business lender will force the banks to diversify their books into business lending. When this has happened in the past our economy has taken off because businesses are able to access debt where they currently can’t.
Here’s hoping we’re almost there and I’ll be looking out for your emails.