Channel Usage – Page 11 – Digital Finance Analytics (DFA) Blog

Four in Five Retailers Say Mobile Is Having a Major Effect

Mobile’s importance is becoming undeniable according to eMarketer.

Mobile still accounts for a fairly small share of total retail sales, and, in many markets, even of digital retail sales. But retailers are feeling the impact of mobile devices.

In 2014, a little over half (57%) of retailers worldwide surveyed by payment solutions provider Payvision reported experiencing major growth in mcommerce sales. Among the total, 33% strongly agreed that growth was significant—already a sizeable share.

But by 2015 the evidence in favor of mcommerce was overwhelming. Nearly half of respondents were now in the “strongly agree” group, with an additional 34% agreeing more generally. Overall, 79% of retailers worldwide were undergoing major mcommerce growth this year.

More retailers around the world are getting into omnichannel as a result. This year, 91% of respondents said they offered customers the option to shop and pay across multiple devices. That was up from 84% last year.

Nearly three in four respondents reported this year that such an option had boosted sales via digital devices. In addition, 71% of retailers surveyed said they were focused on offering seamless shopping across multiple devices as well as offline sales channels.

eMarketer estimates that in 2015, US consumers bought $74.93 billion worth of goods and services via mobile devices, up 32.2% over 2014 spending levels. This year, mobile accounted for 22.0% of all retail ecommerce sales in the US, up 3 points since last year. It still made up a tiny portion of total retail sales, however, at just 1.6%.

In some other world markets, mcommerce is a bigger part of the picture. In South Korea, for example, mcommerce sales made up 46.0% of retail ecommerce sales and 5.1% of total retail sales this year, according to eMarketer estimates. In China, 49.7% of retail ecommerce sales and 7.9% of all retail sales occurred via mobile devices in 2015.

ANZ to launch new internet banking site

ANZ today announced a significant upgrade to its internet banking platform that will see it become the first major Australian bank to have a consistent user experience across desktop, tablet and mobile.

Launching this weekend, ANZ’s 2.1 million internet banking customers in Australia will be able to access the full suite of internet banking features from any device as well as improved security features.

ANZ Managing Director Products and Marketing, Matthew Boss said: “We know our customers are looking to do more of their banking via digital channels and we also know we need to continue to make banking as simple and secure as possible.”

“This upgrade complements our existing mobile banking application ANZ goMoney™ and allows customers to do more of their banking when and how they want with no instructions required.
“Given smartphones are expected to account for 90 per cent of all internet traffic by 2020, we’re pleased to be able to provide our customers with internet banking that is quick and simple to use on any device,” Mr Boss said.

Additional features of the Internet Banking upgrade include:

Ability for businesses to now approve payments on-the-go using mobile internet banking
Easy new menu navigation to help customers update contact details, pay a bill or open a new account
State-of-the-art visual design where accounts look like the actual card in the customers’ wallet.

ANZ has also strengthened the security of internet banking with the introduction of ANZ Shield, which authenticates transactions and activity using a one-time security code to allow customers to increase pay anyone limits or instantly reset their password.

ASIC Concerned About Broker Advertising

ASIC says Elite Mortgage Brokers, a Melbourne-based Chinese mortgage broking firm, has recently agreed to make changes to its website and print advertisements in response to concerns raised by ASIC.

ASIC was concerned that the following statements, which were made in Chinese, were misleading or deceptive or likely to mislead or deceive:

100% success rate
pre-approvals within 15 minutes
Melbourne’s largest Chinese mortgage broker; and
matching of all banks’ interest rates.

The advertisements were made over the period October 2014 through to March 2015 in the Melbourne Property Weekly and on Elite Mortgage Brokers’ business website.

ASIC was concerned that statements claiming a ‘100% success rate’ were likely to be misleading because they suggest that credit will be provided to all applicants. Lenders or brokers that are subject to responsible lending obligations generally cannot claim that all applicants will receive credit – doing so is either non-compliant with the lending laws or otherwise misleading or deceptive.

ASIC was also concerned that the other statements made were likely to be misleading or deceptive, as Elite Mortgage Brokers could not properly substantiate the claims.

ASIC Deputy Chair Peter Kell said, ‘All representations made in advertising of credit-related products, including representations regarding the size of a business or the nature of services provided, must be accurate and able to be substantiated to avoid consumers being misled. This extends to ensuring consumers from non-English speaking backgrounds are not misled or deceived by advertising in a foreign language.

‘ASIC monitors all forms of advertising and will continue to monitor advertising targeted at non-English speaking consumers. Where necessary, ASIC will take enforcement action’, Mr Kell said.

APRA May Cease Point of Presence Statistics

APRA has released a discussion document on the future of the Points of Presence statistics which they currently produce. The data provides useful industry level information on channel behaviour and usage, and is highly relevant in the context of digital disruption and migration. The paper suggests modification of the reporting, or possibly a cessation. We believe the POP data is highly relevant and useful and attempts to stop reporting should be resisted.

The Australian Prudential Regulation Authority (APRA) is the prudential regulator of the Australian financial services industry. It oversees banks, credit unions, building societies, general insurance and reinsurance companies, life insurers, friendly societies, and most of the superannuation industry. APRA collects a broad range of financial and risk data from regulated institutions as inputs to its supervisory assessments. Data collected from regulated and unregulated institutions also assist the Reserve Bank of Australia (RBA), the Australian Bureau of Statistics (ABS) and other financial sector agencies to perform their roles. APRA also collects some data to enable APRA to publish information about regulated institutions, and in other cases, to assist the Minister to formulate financial policy. Much of the data APRA collects are used for multiple purposes to reduce the burden of reporting.

APRA publishes as much of the data collected as are considered useful and as resources permit, subject to APRA’s confidentiality obligations with respect to individual institutions’ data. Publication of industry-level statistics enhances understanding of the industries regulated by APRA, aids public discussion on policy issues, and supports well-informed decision-making by regulated institutions, policy-makers, market analysts and researchers. Publication of institution-level data, where possible, is also consistent with promoting the understanding of the financial soundness of regulated institutions.

APRA observes international statistical standards in developing, producing and managing its statistics (except in the few cases where doing so would conflict with APRA’s primary role as a prudential regulator). By doing so, APRA helps protect commercially-sensitive information provided by institutions, whilst providing statistics that are useful and reliable, and that meet the needs of users.

APRA publishes detailed banking services provided within Australia by Authorised Deposit-taking Institutions (ADI) in its ADI Points of Presence (PoP) statistics. APRA is reviewing the PoP statistics to ensure that the statistics remain relevant and useful.

This paper focuses on two options for the future of the PoP statistics and data collection:
1. streamline the PoP statistics and data collection; or
2. cease the PoP statistics and data collection.

APRA is seeking feedback on the proposed changes. Written submissions should be forwarded by 18 November 2015, preferably by email to:
Manager, Banking Statistics,
Australian Prudential Regulation Authority
GPO Box 9836
Sydney NSW 2001
Email: statistics@apra.gov.au

NAB to offer “Robo-Advice”

According to Money Management,

NAB has become the first of the ‘big four’ banks to announce a digital advice offering, stating that 40,000 selected customers would be given free access to the service via the bank’s internet banking service, with an expectation of providing the service to its 3 million customers in due course.

The service, named NAB Prosper, has been labelled as digital advice with the bank distinguishing it from robo-advice by stating the advice would be personalised and tailored to its customers via a range of specific questions relating to their current financial situation and future goals.

The service would also be distinguished from robo-advice in that it would not provide transaction services nor would it direct people to purchase any product.

Rather the service would provide an up to date view of a customer’s financial position and provide a range of broad advice options based around risk profiling and financial modelling with customers directed to personalised advice if they require it.

The initial phase of the service will provide advice on super and insurance and will be available from early October and will eventually expand to cover debt, cash flow, investments and estate planning in 2016.

NAB executive general manager – wealth advice, Greg Miller, said NAB Prosper was designed to provide advice to the 80 per cent of people who did not have an ongoing relationship with a financial adviser and would complement the face to face advice process.

“The personal relationship between a consumer and an adviser is crucial, and we know this relationship will continue to be a fundamental part of the advice process,” he said.

“Allowing people to see their current financial situation has the ability to trigger a conversation with an adviser. With only one in five Australians currently seeking financial advice, this can only be a good thing for customers and the industry more broadly.

“Advisers benefit from this by being able to capitalise on changing customer segments and deliver targeted, relevant advice, simply and efficiently. It supports growth, strengthens capabilities and will improve efficiencies across our network.”

Miller said the move to provide digital advice was driven by changing consumer needs and behaviours and the advice sector was not immune but would continue to play a role dealing with major and important events and decisions for clients.

“The shape of the advice industry is changing and it will be largely driven by consumers, whose needs are evolving. Different consumers want to access financial advice in different ways, and we need to adapt our offering so consumers can choose when, where and how they deal with us,” he said.

“We’re continuing to look at ways to evolve our business to meet these changing needs. This evolution will continue to include advisers for those life-stage events where a customer wants to sit down and have a face-to-face discussion with their adviser.”

Aussies using only their Mobile or Tablet to bank triples in 3 years

According to Roy Morgan, an estimated 1.1 million (5.8% of) Australians use only their mobile phone or tablet to conduct banking activities in an average 4 week period. In three years, the number of Australians doing “mobile-only banking” has tripled. This means they do not use any other banking channel, such as website, branches, adviser/banker or the telephone, to deal with their bank. This chimes with earlier DFA research on channel preferences, where we showed that specific segments lead the way into digital usage.

By June 2015, 33% of Australians conducted internet banking using a mobile phone or tablet (app) in an average four week period. This has resulted in a group of people that only deal with their banks via a mobile or tablet. As assumed, younger generations take up digital channels at higher rates than older ones, with close to one out of ten people under 34 years old doing ”mobile-only banking”.

% who only conduct banking via a mobile phone or tablet in 4 week period

CPA’s Push into Broking Will Threaten the Channel

According to Australian Broker, accounting body CPA Australia’s planned move into mortgage broking is going to shake up traditional accountant/broker relationships and referral sources, citing one broker and digital marketing expert, so brokers need to insure themselves now.

Darren Moffatt, founder of Seniors First Specialist Finance and the CEO of Webbuzz – which specialises in digital marketing for financial services – told Australian Broker that CPA’s plans to obtain an Australian Credit License and move into mortgage broking is a big threat to the broker channel.

“If you talk to the majority of brokers, they have one or more accountants as referral sources. Everyone in the industry would agree that accountants are the best referral source you can get. So this announcement by CPA is really going to shake things up,” he said.

“CPA is essentially saying to their accountant membership, ‘we now have the channel for you’ – if you want to generate additional revenue for your business, we will make it easy for you to get into mortgage broking. They are saying ‘we’ve got the credit license and the infrastructure; all you need to do is send the deals in.’

“This is going to threaten a lot of existing broker/accountant relationships… Those brokers who are heavily reliant on accountants as referral sources are really going to have to start to look at hedging their bets and developing alternative streams of inquiry in case they start losing referral sources.”

The most important way for brokers to insure themselves against any threat, according to Moffatt, is to invest into their online footprint.

“Brokers should be getting into the online channel and starting to build a digital footprint for their business. That means establishing a modern, mobile-friendly website and converting their website into a lead generation machine.

“For brokers who have relied heavily on referrals from accountants, the most obvious way is to go direct to market and essentially build the infrastructure required to generate leads from the internet.”

But where is the best place to start? Moffatt says that there are two key elements brokers should focus on to start with.

“The key thing at the moment is to have a mobile site. If you don’t have a mobile-friendly website now then you essentially get penalised by Google. Another thing is Google rewards specialisation, so brokers need to figure out what kind of business they want to specialise in for online.

“It is better, for instance, if they decide to use their online marketing to really go after investor loans, rather than go for the general mass market home loan. Or you can take it down to a localisation, so targeting specific areas, such as Sydney,” he told Australian Broker.

Peer-To-Peer Lending, The US Experience

DFA has been tracking the progress of Peer-to-Peer lending, and it continues to grow fast round the world. Here is a summary from the Lending Mag covering the best U.S. Peer-to-Peer Lending Sites for Borrowers. It is quite interesting comparing the different business models, charging structures and sheer scale of lending through this channel. In the US, at least, it is becoming a valid alternative funding source.

#1 Prosper Marketplace

Prosper Marketplace is The Lending Mag’s first choice among U.S. peer-to-peer lending companies for borrowers. This popular p2p lending platform made history in the United States when they became the first peer-to-peer lending site in the country in 2006. Since that time, Prosper has experienced tremendous growth and success, having recently surpassed $3 billion in loans. Recently, they were named by Forbes as one of the most promising companies in America.

Prosper places as number #1 on our list of p2p lenders because of the accessibility and attention to customers that they provide. Out of all the p2p lenders we have had interactions with, Prosper representatives were the most accommodating and reachable. You don’t feel like you are dealing with a cold, unreachable entity. You can sense the humanity behind the big name and they are there to help you. Here are more details about Prosper’s peer-to-peer lending site:

Maximum Loan Amount Available: $35,000

Minimum Loan Amount Available: $2,000

Average Time to Receive Funds (in days): 4 to 10 days

APR: 6.73% to 35.97%

Interest Rate: 6.05% to 31.90%

Term of Loan (years): 3 or 5

Minimum Credit Score Required: 640

Maximum Debt-to-Income Ratio: 30%

Loan Type (Secured or Unsecured): Unsecured loan

Application Affect On Your Credit: None

States Eligible To Borrow From p2p Lending Sites In Question: 47 + DC

Origination Fee: 1% to 5%

Late Fee: Greater of $15 or 5%

Unsuccessful Payment Fee: None

Check Processing: $15

Application Fee Charge: None

Prepayment Penalty Cost: None

Best Method of Contacting Their Support: Phone

#2 Lending Club

Lending Club is an absolute giant in the US peer-to-peer lending space. You really can’t talk about U.S. peer-to-peer lending without mentioning them. Their peer loans platform was founded shortly after Prosper in 2007, they’ve actually surpassed Prosper in the amount of loans funded. Many p2p loan investors feel that Lending Club’s website has the best user interface and it definitely has the largest and most impressive 3rd-party investor ecosystem.

In December of 2014 Lending Club had a wildly successful IPO on the NYSE, becoming the first publicly traded online peer-to-peer lender in US history. If this p2p lending site review was focused on investing, Lending Club would probably have been ranked #1. But getting approved to borrow through Lending Club can be a bit more difficult than with Prosper, knocking them to number #2 on our list from a borrower’s perspective. Here are more details about Lending Club’s peer-to-peer lending site:

Maximum Loan Amount Available: $35,000 ($300,000 for business loans)

Minimum Loan Amount Available: $1,000 ($15,000 for business loans)

Average Time to Receive Funds (in days): 4 to 10 days

APR: 5.99% to 32.99%

Interest Rate: 5.9% to 25.9%

Term of Loan (years): 1, 3 or 5

Minimum Credit Score Required: 660

Maximum Debt-to-Income Ratio: 35%

Loan Type (Secured or Unsecured): Unsecured loan

Application Affect On Your Credit: None

States Eligible To Borrow From p2p Lending Sites In Question:

Origination Fee: 0.99% to 5.99%

Late Fee: Greater of $15 or 5%

Unsuccessful Payment Fee: $15

Check Processing: $15

Application Fee Charge: None

Prepayment Penalty Cost: None

Best Method of Contacting Their Support: Phone

#3 Upstart

If you’ve recently graduated from college, you probably don’t need us to tell you how hard it is to convince a bank to give you a loan. Young people fresh out of college don’t usually have the type of income needed, enough credit history or a high enough credit score to get a reasonable loan rate, if you can get a loan at all.

This is where Upstart steps in. This innovative lending site began facilitating p2p loans in April 2014. They aim to help those who are under-served by traditional loan companies but are filled with potential. Instead of only judging creditworthiness from your credit score, employment history and income, Upstart looks at a wide range of nontraditional factors in order to determine whether you should get a shot at getting your loan funded. These other factors include which college you graduated from, your grade point average and it’s possible that they even take your SAT scores into account.

Upstart prides itself on looking past the cold numbers and saying yes to your requests when other lenders say no. Most of Upstart’s borrowers use the funds as debt consolidation loans in order to pay off high-interest credit cards, but you can use the funds as you please.

This fast-growing p2p lending site is becoming popular among Millennials especially because they are often in a situation where they don’t have a long track record of credit history and are often offered very high loan rates because of it. Taking a bad loan at an early age can easily set your financial life on the wrong road and Upstart realizes that such poor options are not necessary or fair.

Company officials have expressed that the company’s loan products are meant to serve a young and potential-laden population that is very likely to build a solid credit profile in the future, but just hasn’t had the opportunity to do so yet. By using their sophisticated algorithm to decipher key data, the peer-to-peer lending site is able approve the extension of consumer credit at affordable rates to young borrowers who are well-positioned to handle the loans responsibly.
Here are more details about Upstart’s peer-to-peer lending site:

Maximum Loan Amount Available: $35,000

Minimum Loan Amount Available: $3,000

Average Time to Receive Funds (in days): 2 to 16

APR: 5.67% to 29.99%

Interest Rate: 5% to 25.26%

Term of Loan (years): 3

Minimum Credit Score Required: 640

Maximum Debt-to-Income Ratio: 40% to 50%

Loan Type (Secured or Unsecured): Unsecured loan

Application Affect On Your Credit: None

States Eligible To Borrow From p2p Lending Sites In Question: 50

Origination Fee: 1% to 6%

Late Fee: Greater of $15 or 5%

Unsuccessful Payment Fee: $15

Check Processing: $15

Application Fee Charge: None

Prepayment Penalty Cost: None

Best Method of Contacting Their Support: Phone

#4 Funding Circle

Funding Circle is one of the world’s biggest peer-to-peer lending sites that actually focuses primarily on small business loans. They have a US counterpart to their peer to peer lending UK branch. They’ve facilitated more than $1 billion in loans to more than 8,000 businesses in the US and UK combined. Today, 40,000 retail investors (normal people), major banks, financial institutions and even the UK Government are lending to small businesses through the Funding Circle marketplace.

Funding Circle is intensely focused on helping small businesses get loans through their p2p lending site because they have roots in small business. Their U.S. co-founders started the peer-to-peer lending site because they were small business owners themselves, they were getting rejected for small business funding at every turn and after getting rejected for small business loans nearly 100 times, they realized something was very wrong with the traditional bank lending system, it was internally flawed. They saw first hand that even when you have a growing and successful business venture that’s doing well, it’s still far too difficult to get a business loan. From that point forward, they were more determined than ever to build a more sensible small business loan solution for American business owners.

Here are more details about Funding Circle’s peer-to-peer lending site:

Maximum Loan Amount Available: $500,000 for business loans

Minimum Loan Amount Available: $25,000 for business loans

Average Time to Receive Funds (in days): 5 to 14

APR:

Interest Rate: 5.99% to 20.99%

Term of Loan (years): 1 to 5

Minimum Credit Score Required: 620

Maximum Debt-to-Income Ratio: Not Disclosed

Loan Type (Secured or Unsecured): Secured loan

Application Affect On Your Credit: Hard pull on your credit

States Eligible To Borrow From p2p Lending Sites In Question: 47 + DC

Origination Fee: 2.99%

Late Fee: 10%

Unsuccessful Payment Fee: $35

Check Processing: $0

Application Fee Charge: None

Prepayment Penalty Cost: None

Best Method of Contacting Their Support: Phone

#5 Peerform

Peerform was started by Wall Street executives with extensive backgrounds in Finance and Technology in 2010, the peer-to-peer lending site’s creators saw an opportunity to make funding available to borrowers when they noticed that banks seemed unwilling to lend to people and small businesses in need.

Peerform has built a good track record of giving borrowers an opportunity that the banking system had denied them and a very positive experience when seeking unsecured personal loans through an online lending process that is transparent, fast and easy to understand.

To apply for an online peer-to-peer loan from Peerform, you fill out the application on their site and they will make a soft pull on your credit to see if you meet the minimum requirements for a loan. They are one of the few major peer-to-peer lending sites that accepts borrowers with FICO scores as low as 600. Those who qualify for a loan have their loan request posted on the website and it stays active for 14 days while peer-to-peer investors decide if the loan is an attractive investment or not. If your loan is fully funded within the 2 week time period, you’ll be contacted by Peerform to approve and accept the loan. If your loan is not fully funded in the 2 week time period but has raised at least $1,000, you may choose to accept or reject the lesser amount. It is completely your call, you are not obligated to accept the loan. If you do choose to accept the loan, it will be deposited to your bank account within a few business days.

When we tested their customer service and contacted Peerform, we had positive experiences both via email and on the phone. After sending an email we received a written response within 24 hours, and most of our questions were answered to satisfaction. When talking to them by phone, we noted that the company rep was very knowledgeable about the loan process and able to give helpful answers. Their site also provides all of the most important information you’d need to know about their peer-to-peer loan process, including APRs, interest rates, potential loan amounts and fees, etc. You can also contact a customer rep using the live chat option they have on the website. Here are more details about Peerform’s peer-to-peer lending site:

Maximum Loan Amount Available: $25,000

Minimum Loan Amount Available: $1,000

Average Time to Receive Funds (in days): 2 to 16

APR: 7.12% to 28.09%

Interest Rate: 6.4% to 25%

Term of Loan (years): 3

Minimum Credit Score Required: 600

Maximum Debt-to-Income Ratio: Varies

Loan Type (Secured or Unsecured): Unsecured loan

Application Affect On Your Credit: None

States Eligible To Borrow From p2p Lending Sites In Question: 23

Origination Fee: 1% to 5%

Late Fee: Greater of $15 or 5%

Unsuccessful Payment Fee: $15

Check Processing: $15

Application Fee Charge: None

Prepayment Penalty Cost: None

Best Method of Contacting Their Support: Phone

#6 Sofi

Sofi is a highly respected marketplace lending website, with nearly $3 billion in peer loans issued to this date.

They made it onto this peer-to-peer lending sites review because they do a good job at assisting early stage professionals accelerate their success with student loan refinancing, mortgage refinancing, mortgages and unsecured personal loans.

Their nontraditional loan underwriting approach takes into account merit and employment history among other determining factors, in effect, allowing their peer-to-peer lending site to offer loans that often are hard to find elsewhere.

Here are more details about Sofi’s peer-to-peer lending site:

Maximum Loan Amount Available: $100,000

Minimum Loan Amount Available: $5,000

Average Time to Receive Funds (in days): 3

APR: 5.5% to 8.99%

Interest Rate:

Term of Loan (years): 3, 5 or 7

Minimum Credit Score Required: Varies

Maximum Debt-to-Income Ratio: Varies

Loan Type (Secured or Unsecured): Secured loan

Application Affect On Your Credit: None

States Eligible To Borrow From p2p Lending Sites In Question:

Origination Fee: None

Late Fee: Lesser of 4% or $5

Unsuccessful Payment Fee: $15

Check Processing: $15

Application Fee Charge: None

Prepayment Penalty Cost: None

Best Method of Contacting Their Support: Phone

Read more: http://thelendingmag.com/peer-to-peer-lending-sites/#ixzz3en8E6bSg

Finance Through a Fintech is Fast, but Ask These Questions First

Interesting article in the BRW by Neil Slonim, of thebankdoctor.com that aligns with my earlier post on Online Lending for SMEs.

There has been considerable recent discussion about fintechs injecting much needed competition into the SME lending market. For those unfamiliar with this new word, fintech (financial technology) is a line of business using software for the purpose of disrupting incumbent players such as banks. ASIC Chairman Greg Medcraft recently said “the time is ripe for digital disruption and ASIC wants to make it easier for fintechs to navigate the regulatory system”. Notwithstanding these encouraging developments it is still early days and small business owners would be wise to resist the lure of quick and easy money from fintechs until they really understand how they work.

The attraction of fintechs is the expectation of a “quick yes” via a streamlined online approval process. Fintechs usually offer business loans between $5k and $300k and terms generally range from 7 days to 12 months. They make funds available in a matter of days and sometimes even hours. Rates vary from around 9 per cent to 30 per cent and often well beyond. Most loans are made without property security. Fintechs are generally not suited for businesses that have requirements for long-term debt and if you have property security you will get a better rate elsewhere.

Some business owners will try a fintech if the bank either rejects them or can’t make a decision in the time frame required. Others will by-pass the bank based on a preconceived belief that the banks wont help them.

For better or worse most SMEs know what to expect when dealing with banks. They know the big banks have been around forever and have large and strong balance sheets but this new breed of lender is an entirely different species.

Unlike the banking sector where four well known players and their offshoots control around 90 per cent of the market there are already many fintechs in the SME space with new entrants constantly popping up as entrepreneurs see the opportunity to disrupt the big four oligopoly. As more players enter this field, it will be interesting to see how they go about developing and conveying a distinctive customer value proposition.

Australian owned fintechs currently operating in the SME space include Moula, Prospa, getcapital, and ucapital. The US online lender Ondeck is establishing a local operation in conjunction with MYOB and some well-known local investors. The barriers to entry are relatively low and the level of regulation is not as stringent as for banks. Issues such as funding, liquidity and fraud will no doubt come to the fore when the first fintech fails. Liquidity events could lead to unscrupulous fintechs embarking on a Ponzi scheme but we can safely assume that no fintech will be the beneficiary of a ‘too big to fail’ government bailout. If you borrow from a fintech that gets into difficulty how would you refinance a loan that a bank wouldn’t touch?

Borrowing from fintechs is expensive due to relatively high funding costs plus high default rates. Ondeck US’s operation has a default rate of 6 to 7 per cent and when an unsecured loan falls into default, the lender’s recovery prospects plummet.

Potential borrowers need to be mindful of all these issues. So how does a business decide if fintech borrowing is right for them and if so which is the most suitable lender? Here are three tips for SMEs to consider:

1. DO YOUR DUE DILIGENCE

Do your DD as you would if you were looking for any new major supplier or stakeholder. Some of your queries will be able to be satisfied via the lender’s website but if you’re not sure about anything, call them. Ask questions like:

•Who are your shareholders and management?

•What qualifications and experience do you have?

•How much capital have you committed?

•Can I speak to some existing clients?

•How reliable is your funding source?

2. BE SURE YOU UNDERSTAND AND CAN AFFORD TO PAY THE FEES

Ensure you understand all the fees and charges. For instance, fintechs often quote an interest rate based on the term of the transaction so a 3 per cent rate which might look fair to you could in fact be 3 per cent on a loan of 30 days which represents an annualised rate of interest of 36 per cent.

Once you understand all the costs, re-visit your forecasts to ensure you can still make an acceptable profit. No point in working just for your financier!

3. CONSIDER WHAT WILL HAPPEN IF THINGS GO WRONG.

You probably have a good idea of what happens if you cant meet your obligations to a bank. How would this work with a fintech? How open would they be to extending the term of your financing arrangements if for instance a debtor is slow to pay? What dispute resolution procedures do they have?

HOW ARE THE BANKS RESPONDING?

The banks recognise they are burdened with legacy cost structures that place them at a disadvantage relative to disruptors who have lower cost and more scalable systems. They are acutely aware of the threat and are monitoring developments closely. Fintechs are not yet taking market share from the banks but clearly the potential exists for serious inroads once this business model becomes established.

In time banks will respond by acquiring the better structured and performing fintechs. Another bank strategy will be to take equity in start up fintechs backed by big name players with deep pockets as Westpac has done with the online personal lender Society One.

It’s still early days but over time fintechs will become a significant alternative funding source for SMEs. In the meantime SMEs contemplating borrowing from a fintech would be well advised to first ensure they understand exactly what they are getting themselves into.

Neil Slonim is a banking advisor and commentator and founder of theBankDoctor.com.au , a not for profit online source of independent banking advice for SMEs.

Mirrored with permission of the author.

Digital Disruption and P2P Lending

DFA research was featured in a Sydney Morning Heald feature today “Banks look vulnerable as lucrative loans market gets personal online” by banking reporter Clancy Yates. The article nicely highlights some of the interesting and potentially disruptive plays in the evolving Australian market, including the peer-to-peer lending sector.