How Big Is The SME Fintech Unsecured Lending Market?

Given the rise in the number of Fintechs targetting the SME unsecured lending sector, it is timely to consider the potential addressable size of the market in Australia. To do that we have taken data from the Digital Finance Analytics SME survey of 26,000 businesses, and used this data to estimate the current size of the market. The latest data is from August 2016.

Piggy-BusinessFirst, we need to focus in on smaller SME’s, so we set a turnover ceiling of $500k. In fact though there are more than 1 million businesses in this category, many SME’s have much smaller turnovers than that. Then we remove from the analysis secured loans (either against property or other assets), leases, factoring and credit card debt. This gives us a read of the level of unsecured debt. We also excluded businesses who prefer not to borrow at all.

So, we estimate that currently, the stock of unsecured loans to these small businesses is around $8.2 billion.  Of this, $5.3 billion would show up as a business loan, either as an overdraft, structured loan or term loan in the RBA data. The rest is classified as personal debt, meaning it is a personal loan or overdraft, but it will still be used for business purposes. So, $2.9 billion relates to loans which would be classified as personal finance in the RBA data. This also highlights the significant “twilight zone” between business and personal finances.

Next, we need to estimate the annual flow of these loans, and also overlay those businesses with the potential to access a Fintech loan. At very least they need to be comfortable with using online services, and tools. So we excluded the “digital luddites” and those not tech savvy.

We estimate that $3.6 billion of unsecured lending was written by lenders, of all sorts, to our target businesses, in the past 12 months. Of this $2.1 billion was a business loan, and $1.5 billion was a personal loan. This includes refinancing of existing loans, and new loans.

Most Fintech SME lenders will only lend to a business, with an ABN. So, we should discount the $1.5 billion of personal loans. That leaves a current annual addressable market of around $2.1 billion. We also expect this to grow strongly in coming years.

We are already seeing a strong trend in the growing awareness of Fintech among businesses. The joint DFA and Moula Disruption Index is tracking this momentum.

Dis-July-2016Increased digital penetration, and greater awareness of Fintech alternatives will increase the addressable market quite considerably. In addition, new lenders may offer loans to businesses which today cannot obtain credit.

So, in conclusion, despite the relatively early history of the sector, there is an addressable market which is significant, and interesting and north of $2 billion annually. Whilst the market is small compared with the $40 billion consumer credit card industry or the $140 billion total consumer credit market, it is set to grow.

Finally, it is also worth considering our post from yesterday, which looked at some Fintechs charging very high rates of interest. Will increased competition drive rates lower and create a still larger market?

Banking red tape costs Aussie SMEs $7 billion a year – Tyro

BANKING red tape is robbing more than 880,000 of Australia’s two million small and medium sized businesses of four weeks’ productive work time a year, costing the national economy almost $7 billion annually, new research has found.

This equates to an extra 20 working days a year – or the entire annual holidays of the average employee. 

Tyro’s Exploring banking inefficiencies for SMEs report has found that 44 per cent of Australian SMEs, or 880,000 businesses, spend more than three hours every week checking, entering, paying and reconciling data, costing each business an average of $7,800 a year.

The findings of the survey reveal the seven major pain points in terms of productivity when it comes to online business banking and related activities.

SME-PaiinpointsTyro’s report also found that:

  • 700,000 businesses, or 35% of SMEs, believe their bank could be doing a better job.
  • One million, or 50%, of SME owner/operators are doing their own bookkeeping.
  • 400,000, or 20%, of SME owner/operators don’t use any form of accounting software.

“Large companies, with more than 200 employees, make up only 0.3% of businesses operating in Australia,” Tyro CEO Jost Stollmann said today. “By comparison, small and medium sized businesses are the creative and innovative heart of the Australian economy, generating more jobs than any other sector. “But SMEs are drowning under the burden of inefficient online business banking processes, that are robbing them of three hours a week, or 20 days a year.

“This means SMEs have to work a 13-month year, or give up the equivalent of four weeks’ annual holiday to compensate for banking inefficiencies.” 

The findings explain why a staggering 700,000 SMEs are unhappy with their business bank’s performance. Mr Stollmann said efficient online banking was critical to the success of SMEs and for a large proportion of Australian businesses their bank was letting them down. “Banks need to try harder to reduce the burden on Australian businesses,” he said. “It is clear that business banking requires a rethink. It needs to be mobile, embedded into business and accounting software and fully automated. “The winners in the business banking of the future will marry deep technology and banking know-how.”

Despite SMEs playing a critical role in the Australian economy, their contribution to GDP has slowed since 2012. 

Mr Stollmann said the priority was to establish what the major pain points were for the industry and help SMEs drive future growth. 

Billions of dollars have been spent by the private and public sector to assist SMEs, particularly around improving workplace participation. 

However, very little has been done to address the issues of access to capital or business and banking improvement processes. 

Mr Stollmann said SME banking was an industry in transition, and the major providers needed to make it easier for customers to do business. 

“Australia’s small and medium sized businesses are developing into the most attractive banking customers in the country. 

“From a market that was once considered very niche and challenging to serve, SMEs have now become a strategic target for banks,” he said. 

“This flows on from the 2008 financial crisis, when banks began to shift their focus away from large corporates in an effort to seek high yields in a low interest rate environment. 

“Banks now see SMEs as core to their business. 

“Australia should be looking at action to improve SME productivity, in recognition of the changing terms of trade and resources decline. We should help SMEs operate more efficiently.” 

Commonwealth Bank of Australia CEO Ian Narev acknowledged this recently when he said CBA had to innovate or die. 

“If we don’t innovate successfully, we’re toast,” Mr Narev told free-market think tank The Centre for Independent Studies in June. 

“Not we’ll lose a bit of profit, we’ll lose a few customers — we’re toast. And I’m talking over a decade, not over six months, but it is an existential imperative for us to innovate.”

Long pay times sinking contractors

The DFA SME survey underscores that payment terms for many businesses continues to extend, creating real headaches in terms of cash flow, profitability and sustainability.

Using date from our latest results, from 26,000 business owners, we see that working capital is the main reason to borrow.

SME-DD-3The main driver of working capital is delayed payments. There are significant variations by industry, with those in the transport sector the worst hit.

SME-DD-2Nearly half of payments are received between 50 and 60 days after billing. Over 60 days includes some payments to more than 120 days due.

SME-DD-1Businesses told us that they are getting squeezed harder as larger companies and government departments hold up their payments for longer.  You can read the last SME report, released in late 2015. The next edition will be released shortly.

We are not the only ones highlighting this issue.  According to The West Australian today:

Up to eight contracting businesses are going under each week, an equipment hire industry figure says, with late payment by clients the main cause.

Sally McPherson, chief executive of online equipment broker iSeekplant, called on governments to crack down on ballooning payment periods.

Ms McPherson said two to three members of iSeekplant had failed per week in WA over the past six weeks. Information about the other collapses came from the broker’s State office.

The victims ranged from owner-operator outfits in construction and mining to businesses with about 150 machines.

Many were mid-market players with 20 to 40 trucks, loaders and excavators.

Ms McPherson said some collapsed operators were re-emerging as new companies after escaping debts.

“We’re seeing definitely the worst conditions in the plant and equipment market for 30 years,” she said.

She blamed client payment periods of 90 to 120 days.

“It’s the number one factor,” Ms McPherson said. “Big companies are leaning on these tiny enterprises for their cash flow.

“The margins on hire in WA, if at all profitable, are razor-thin. These companies go under just purely because of cash flow. The bank doesn’t ever give them a 120-day break on their payments. It’s not fair.”

Ms McPherson said small contractors agreed to such contract terms because of the larger companies called the shots.

“Government should step in and stipulate what’s a fair term considering that it’s government money,” she said.


SME Business Confidence On The Rise – NAB

The latest NAB Quarterly SME Survey, to June 2016, suggests the non-mining recovery is broadening to include smaller businesses, with SME business conditions highest in six years, and confidence above long-term average despite some increased pressure on cash flow, and falling forward orders.

Business conditions for SMEs gained further traction in Q2, rising by 2 points to +6 index points, a level not seen since 2010 and comfortably above the long-run average of +4. It is especially encouraging that low and mid-tier firms reported notable improvements in conditions and confidence in the quarter. In particular, low-tier firms reported positive business conditions for the first time in 2 years.

NAB-SME-Jun-2016---1All three components of business conditions rose in the quarter. Trading and profitability conditions surged ahead, reaching levels not seen since 2009. Employment conditions however remain lacklustre. The optics of conditions by firm size were also quite encouraging, with all size categories reporting positive results for trading and profitability conditions, although demand for labour by low-tier firms remains soft.

Meanwhile, SME business confidence rebounded to +5, above the long-term average of +2 index points and more than reversing the fall in the previous quarter. It is worth pointing out that the survey was conducted prior to the Brexit decision and federal election and therefore does not reflect the possible shifts in sentiment due to these political events. However, our latest monthly NAB Business survey for June, which was polled during Brexit (but before the election), did not show an adverse impact on confidence.

NAB-SME-Jun-2016---2In level terms, all SME industries except for construction reported positive business conditions in Q2. The health sector outperformed other industries in the quarter, followed closely by business services, while retail was the weakest after construction. Meanwhile, there has been more evidence of late that the wholesale sector is experiencing a recovery in its business conditions.

NAB-SME-Jun-2016---3All states, except for WA, reported better business conditions in Q2, with QLD showing the biggest improvement again (up 10 points to +11). NSW and VIC continued to outperform, while WA has lagged further behind the national average. All states were more confident in the quarter, with VIC being the standout, while WA was the least confident and the only state to report negative confidence.

Leading indicators were stronger in the quarter as well, with capacity utilisation rising to levels last seen in 2011, while capex reached the highest level since 2007. Overall, SME input price indicators point to relatively contained price pressures, while easing price growth for retailers is consistent with the subdued inflation outlook.

Privatisation is lifting prices and hurting the economy

From SmartCompany.

The privatisation of public assets is “severely damaging” the Australian economy by lifting prices and hampering productivity, according to Australian Competition and Consumer Commission chair Rod Sims.

electricity pylons

Speaking at the Melbourne Economic Forum on Tuesday, Sims urged Australian governments to put an end to explicitly trying to maximise proceeds from the sale of public assets, something the competition boss says is causing him to become increasingly “exasperated”.

“I think a sharp uppercut is necessary and that’s why I’m saying: stop the privatisation,” Sims said, according to Fairfax.

It’s a view shared by Peter Strong, chief executive of the Council of Small Business of Australia, who told SmartCompany Sims’ comments are “spot on”.

“Governments need to stop and have a look at what their role is, “ Strong says.

“Privatisation should make markets more efficient.”

Sims said recent sales of government-owned ports and electricity infrastructure, as well as the deregulation of the vocational education sector, has caused him to change his views on the effects of privatisation on the economy.

“I’ve been a very strong advocate of privatisation for probably 30 years; I believe it enhances economy efficiency,” Sims said at the forum.

“I’m now almost at the point of opposing privatisation because it’s been done to boost proceeds, it’s been done to boost asset sales and I think it’s severely damaging our economy.”

Sims told the forum that the privatisation of electricity infrastructure in Queensland and New South Wales has caused consumer prices to almost double over five years.

“When you meet people in the street and they say ‘I don’t want privatisation because it boost prices’ and you dismiss them … recent examples suggest they’re right,” he said.

“The excessive spend on electric poles and wires has damaged our productivity. The higher energy price we’re getting from some gas and electricity policies are damaging some of the our productive sectors.”

Sims also highlighted the privatisation of ports, including Port Botany and Port Kembla in NSW and the Port of Melbourne, which he said has created monopolistic circumstances.

Strong adds the operation of airports to the list of sectors where there is potential for a large, private operators to control the market with little competition.

“An example of why [Sims] is right is the second airport in Sydney,” Strong says, referring to Sydney Airport Corporation, the operator of the Sydney Airport, having the right of first refusal to develop the Western Sydney airport site.

“Where’s the competition?”

Strong says the presence of oligopolies, or markets that are dominated by a small number of firms, can have detrimental effects on small businesses operating in the same space.

While Australian governments have in recent times spoken about the need for innovation in the economy, Strong points to figures from the OECD in 2014 that found Australian SMEs were ranked fifth out of 29 OECD countries in terms of innovation, while large Australian businesses were ranked the 21st most innovative out of 32 OECD nations.

“I believe the reason why big businesses aren’t innovative is because they have no need to be; they have market dominance so there is no motivation,” Strong says.

Small business concerns continue to rise – ACCC

The ACCC says small business enquiries and complaints to the national competition agency continue to grow, topping more than 7,600 contacts in the first half of 2016.


“We’re continuing to see an increasing number of contacts from the Australian SME sector. These contacts have been particularly concerned about misleading conduct by other firms, consumer guarantees, and agricultural issues,” ACCC Deputy Chairman Dr Michael Schaper said.

The ACCC’s six-monthly Small Business In Focus report #12 has been released today, providing an update on key developments in the small business, franchising, and agriculture sectors.

For the first time, information on the agriculture sector has been included. The ACCC received more than 200 agriculture-related enquiries and complaints, principally focussed on potential misleading conduct or false representations made by other business operators.

Other key developments in the last six months are also highlighted in the report:

  • there have been more than half a million visits to the ACCC’s business web pages;
  • the ACCC continues to receive reports of losses to scams targeting small businesses, with $1.6m lost;
  • new rules for country of origin labelling have commenced (Country of origin food labelling laws);
  • Coles, Woolworths, and Aldi are now required to comply with the entire Food and Grocery Code
  • there were more than12,000 users of the ACCC’s online education programs.

“The number of small businesses contacting the ACCC with concerns has risen steadily over the past few years. The current review of the Australian Consumer Law (ACL) provides a valuable opportunity for small business to speak up and ensure that their concerns are taken into account during that process,” Dr Schaper said.

“Concerns about changes to new credit card surcharging laws in September, and new changes to the ACL that will extend protections from unfair contract terms in business-to-business dealings in November are expected to generate significant interest from the Small Business community.”

The ACCC has prepared advice for small business on the new credit card surcharging laws (Excessive payment surcharges) and new Unfair Contract Term protections (Business-to-business unfair contract terms).

Small Business in Focus is available at: Small business in focus – 1 January 2016 to 30 June 2016

SME’s Get New Loan Information Portal

A new website – – has been developed the by ABA, in conjunction with CPA Australia and with the support of the Council of Small Business Australia (COSBOA) and NSW Business Chamber. It features a step-by-step guide to completing a loan application, including the do’s and don’ts, with particular emphasis on preparing a business plan

ABA Chief Executive Steven Münchenberg said.

Banks approved $88 billion in new small business loans last year, which is $11 billion more than two years ago. While banks’ lending to the small businesses sector is strong, we recognise that for some small businesses being able to access finance is still a concern. To help with this, we have developed a new website that explains what banks look for in assessing loan applications. It also shows how different types of finance may suit different small businesses. We realised that small businesses would benefit from guidance on how to present information in a loan application that goes beyond just providing the company accounts.

CPA Australia Chief Executive Alex Malley said the ability of small business to articulate the how and why of their venture is extremely important to the success of their loan application.

If we have small businesses growing, spending on new plant and equipment and expanding their markets, then they are sustaining and creating jobs and that’s precisely what our nation needs.

COSBOA CEO Peter Strong said:

This is a great initiative by the banking industry and will help people who want to start, buy or expand a business save time and stress.

NSW Business Chamber Chief Executive Stephen Cartwright said:

For small to medium businesses having access to finance is crucial to their success. Having this resource for SMEs to understand the right type of finance for their needs will help maximise their potential and in turn, help Australia’s economy to grow.

They also released a report on small business lending. Their key findings on small businesses in Australia and banks’ lending to the sector are below. The full economic report is available on the ABA website.

  • There are just over two million small businesses in Australia.
  • The rate of formation of small businesses is strong while the exit of businesses due to financial difficulty has fallen from its post global financial crisis (GFC) highs.
  • Small businesses employ 4.7 million people equating to 44.0 per cent of all jobs in Australia.
  • Small businesses contributed about one third of all industry value-added over 2013-14.
  • About 30 per cent of small businesses have no debt.
  • About half of small businesses have a business loan facility other than a credit card.
  • There are about 1 million loans provided to small businesses.
  • Bank loans to small businesses (where the loan amount is under $2 million) totalled $261 billion in December 2015.
  • Almost half of all small business loan outstandings are less than $100,000.
  • The interest rates on small business loans are at generational lows.
  • Almost nine in every ten small businesses say they do not see access to finance, or the capacity to finance further growth in their business, as an ‘issue’.

Measuring Disruption in Small Business Lending

Launched today, the Financial Services Disruption Index, which has been jointly developed by Moula, the lender to the small business sector; and research and consulting firm Digital Finance Analytics (DFA) shows that Financial Services are undergoing disruptive change, thanks to customers moving to digital channels, the emergence of new business models, and changing competitive landscapes. Combing data from both organisations, we are able to track the waves of disruption, initially in the small business lending sector, and more widely across financial services later.

The index tracks a number of dimensions. From the DFA Small business surveys (26,000 each year), we measure SME service expectations for unsecured lending, their awareness of non-traditional funding options, their use of smart devices, their willingness to share electronic data in return for credit, and overall business confidence of those who are borrowing relative to those who are not.

Moula data includes SME conversion data, the type of data SMEs share, the average loan amount approved, application credit enquiries, and speed of application processing.

The index stood at 33.02 from May to July 2015, and rose to 33.94 in the August to October period. The higher the score, the greater the disruption. Of note SMEs are becoming more aware of non-traditional unsecured lending options, are becoming more demanding in terms of application processing times, are more willing to share data and are more likely to apply using a smart device. In addition, the loan values being written are rising, more businesses are willing to share richer data, and the confidence levels among borrowing SMEs is on the rise.

Overall, unsecured lending to the SME sector is being disrupted significantly, and we expect the index will continue to trend higher, as awareness of alternatives to traditional banking continues to rise, and more firms apply for credit.

  1. The average expectation duration was down from 9.2 days in Q3 2015 to 7.5 days this quarter. SMEs continue to expect better service standards when applying for credit. Whilst they accept it may take a few days for an application to be processed, the survey data shows that many think a week should be enough to complete an unsecured loan and get money into their account, and they expect to receive regular progress reports and updates on the way through.
  2. We see a rise in awareness among SMEs of the availability of alternative credit solutions and greater familiarly with the tag “Fintech”. This month 3.75% of businesses recognised the concept, up from 2.74% last month, and momentum is increasing.
  3. More business owners are using smart devices to run their business. They expect access to a wider range of services this way, and more immediate responses. Last quarter 42.6% of businesses used a smart device, this time it was 44.6%, and the rate of adoption is increasing.

The index is featured in an SMH MySmallBusiness article today.

Cash flow is king as technology changes the way SMEs will do their banking

From SmartCompany.

Small business owners, banks and fintechs can all gain valuable insights from a recent survey of SMEs conducted by research company Digital Financial Analytics (DFA).

The results reinforce the critical importance of cash flow management and identify a number of telling behavioural and demographic trends within this all important sector.

The DFA Small & Medium Business Survey 2015 of 26,000 businesses with turnover of less than $5 million reveals 57% of all business borrowing is for working capital.

Extended payments terms and late payments are the main reasons why managing cash flow has become one of the biggest challenges facing SMEs.

With average debtor days running at between 50 and 60, managing cash is a juggling act that can be made even more difficult by some big customers that display little regard for the plight of their smaller suppliers.

This is where the relationship between the SME and the bank becomes so critical. The extent to which business owners feel their bank is there to support them in tight times is one of the key determinants of satisfaction levels and also the propensity to switch banks.

Satisfaction and switching

Thirty-five per cent of SMEs surveyed by DFA are either “satisfied” or “completely satisfied” with their bank, so clearly many customers are happy.

But this also means that two in every three business customers have at least some level of dissatisfaction with their bank. The main causes of frustration can be traced to lack of service, compliance requirements and poor understanding by banks of their needs.

So how does satisfaction translate into shifting intentions? Seventy five per cent of SMEs indicated a preparedness to shift for a better deal yet 60% have never changed banks.

This begs the question: why don’t more SMEs change banks?

Possible explanations are that SMEs don’t proactively seek alternative financing proposals because they either feel “it’s all too hard” or “all the banks are pretty much the same anyway”.

Others may have tried to move but have found no joy because they overestimated their attractiveness to another bank.

When it comes to how much profit banks make from their SME customers, 20% of customers generate around 80% of bank profits.

Perhaps surprisingly, 30% of all SMEs are actually unprofitable for the banks. The problem for many business owners is that they don’t know how attractive they are as a customer and this makes it tricky when it comes to negotiating with banks.


Luddites, migrants and natives

DFA divides business owners into luddites (14%) who are late adopters of technology and hardly use smart devices and services at all; migrants (52%) who are now active users but have had to learn new skills and adapt to the new services; and natives (34%) who have always been digitally aligned. Age is a good proxy for digital take-up with younger business owners firmly in the native category, whilst those over 45 are more likely to be luddites.

Natives are more likely to borrow than migrants, who are more likely to be credit avoiders. The natives also spend considerably more time connected to online services and want all their banking (from product purchase through to service) via smart devices. Natives are significantly more profitable customers for banks in relative terms.

Migrants have a mix of channels with 20% still preferring the bank branch whilst luddites are strong champions of branch access. Luddites provide profitability for branches but as the proportion of luddites decline, it will become even increasingly expensive for banks to support the remaining numbers.

With 86% of businesses either natives or migrants, the future is digital.



Financial Technology (fintech) is a term used to describe the range of innovative digital businesses including online lending and payments platforms.

Creating awareness is one of the many challenges faced by online lenders although many digital natives are very aware and are considering applying or already have applied for an online business loan. Migrants have mixed attitudes to online lenders whilst luddites are just not aware or interested.

Natives are also most likely to consider borrowing via payments platforms like PayPal’s cash flow services, whereas migrants are only using PayPal to make payments and luddites are not engaged at all.

Natives are well advanced in their use of cloud-based services whilst migrants are on the journey. Luddites have not yet started to engage.



According to the DFA survey, 73% of all SMEs are run by men and the bigger the business, the more likely a male will be the boss.

Only 8% of businesses run by females have more than 100 employees, compared with 16% of businesses run by males.

The proportion of SMEs run by females is increasing slowly from 23% in 2006 to 26% in 2010 and now 27%.


Credit cards

Businesses that employ less than four people rely heavily on debt from personal credit cards. This is usually unsecured debt and with 60% of bank write-offs being for unsecured lending. This partly explains why credit card debt is more expensive than secured business debt.



Half of all SMEs will fail within five years of starting up. Failure rates are highest amongst businesses involved in transport, financial services and information media and telecommunications, whist businesses in accommodation, food services and healthcare are less likely to fail.


Technology is changing the game

As challenging as it is to run an SME these days, technology is opening up possibilities for those business owners keen to embrace it.

Banks remain dominant players in lending and payments but increasingly SMEs are able to tap into new avenues of funding and transacting business.

The banks will innovate and also collaborate with fintechs in order to maintain their standing. Despite the advantages the new players possess, we haven’t yet seen how they operate in a severe economic downturn and it’s going to take time for them build critical mass, earn the trust of their customers and produce an acceptable ROE for shareholders.

There will be casualties along the way.

DFA concludes there is a significant opportunity available to players who construct compelling offers to the SME sector.

Understanding the needs and aspirations of small business owners is paramount and the parties who best articulate and most importantly deliver on this this will be the ones that come out on top.

But business owners cannot afford to sit back and wait for things to happen, they need to invest time and effort in exploring what options are available and best suited to their own immediate and future needs.


Neil Slonim is a business banking advisor and commentator and thefounder of, a not-for-profit online resource centre for SMEs dealing with the challenges of funding a small business.