While tighter banking restrictions have forced more small and medium enterprise (SME) borrowers towards non-bank lenders, a lack of awareness is still hindering real growth within the sector.
The Disruption Index, which has been jointly developed by small business lender Moula and research and consulting firm Digital Finance Analytics (DFA), puts the score for Q1 2017 at 38.39, which is 6.1% higher than the score of 36.18 recorded in the same time period a year ago.Despite this, only gradual change has been made to grow awareness amongst SMEs about these alternatives. Looking at evidence on small business knowledge about non-bank lending – such as payments received to non-bank lenders, credit enquiries at credit bureaus, etc – 11% of all data sets reviewed showed use of these lending options. This is the first time the level has risen above 10% since the index was started.
“There is still a certain air of scepticism about non-traditional forms of lending, Martin North, principal of DFA, told Australian Broker. “So SMEs who need to borrow tend to still go to the normal suspects. They’ll look to the banks or put it on their credit cards.”
Because of this, the fintech sector still has a significant job to do in raising awareness about different viable alternative funding options that exist especially since this is a fairly new sector, he said.
“It’s a new type of lender so it takes time to build brand awareness. The other thing is that the approach of applying online and fulfilling online for the SME sector is also quite new and different.”
“I think the fintech sector has a terrific opportunity to lend to the SME sector but they haven’t yet cracked the right level of brand awareness. Perhaps they need to think about how they use online tools particularly advertising to re-energise the message that’s out there.”
The data also showed SMEs are becoming more demanding of the financial services providers, with the expectation that loan applications should take an average of 4.8 days to the final approval.
It seems fintechs are coping with this added demand however, with the Index recording an average loan time of 36 hours. This is slightly longer than the previous quarter’s findings due to added public holidays and school holidays in April.
“Fintechs like Moula are at the quick end but a lot of the traditional lenders such as the major banks take a lot longer,” North said. “What this is saying is that if the expectations of SMEs point to quick approval times and if the major players aren’t able to do that because of their internal systems and processes, then there is an interesting opportunity for the fintechs who can do it quicker. They can actually disrupt.”
Maintaining the status quo was not an option for the major financial institutions because of this added expectation, he added.
“SMEs are looking for quicker, faster responses and there are players out there who can actually deliver.”
“So what’s the barrier to growth? It’s not technology or demand from the SME sector. The barrier to growth is awareness and the willingness of SMEs to commit to this particular new business model.”
The Disruption Index itself examines a number of elements, some of which come from DFA’s survey data of SMEs and others which come from Moula’s analysis of their own experience lending to the small business sector.
“We score each of those elements and essentially we run an algorithm. Each of them has a score between the various elements that’s not weighted individually. We then add them up and that give us a total score. What this is trying to do is put a finger on the pulse of what SMEs are up to and to what extent SMEs are actually aware of fintechs as an alternative funding source,” North said.
