No one can dispute that SMEs are the backbone of Australia’s economy, yet who is really supporting the men and women whose daily work maintains and creates the jobs, the products and the services of our future?
The banking experience: SME pain points
I am yet to find a business owner who disagrees with the fact that the banks are overcharging and underservicing the SME community.
While there might have been excuses in the past, the banks would be hard-pressed to find any today, as technology can provide SMEs with efficient banking. It is not rocket science.
There are many pain points experienced by SMEs when it comes to banking:
- Small-to-medium businesses spend approximately three hours per week resolving banking frictions, which takes time away from their business.
- These frictions caused by the banks’ legacy systems burden SMEs with an estimated cost of $7 billion a year.
- The reluctance of the banking sector to offer unsecured cash flow-based lending starves SMEs of an estimated $60 billion in growth funding.
- The lack of competition within the market means that SMEs are not afforded choice in who they can bank with, which means they often have accounts with providers that do not suit their business model.
- To be eligible for a business loan, many SMEs need to mortgage their house which restricts the accessibility of loans for many business owners who do not have such assets to offer to get their business off the ground.
Imagine how many more jobs, products and services SMEs could create if banking supported them. Imagine how many more SMEs would be able to grow if they had access to growth funding where the lending eligibility requirements helped them to get a loan, instead of making it more difficult. Imagine a world of next-generation banking tailored to the needs of SMEs.
Open banking: enabling innovation and competition
The banking sector in Australia has long held a ‘closed door’ approach, not only to SMEs but also to new players wanting to enter the market with new, innovative banking solutions that would compete with the offerings of the big banks.
The Australian government needs to start prioritising mandating an open API economy. In such an open world, a business customer could instruct their bank to share their data with another financial institution. This way, the SME could obtain a more competitive offer and could switch to an alternative provider without resubmitting all of the data for authentication purposes.
Today’s reality is that switching banks is so complicated and burdensome that many just do not proceed. They lose the benefit of the competitive offer, and new entrants and innovators cannot scale up a business because:
- The switching effort demotivates SMEs from seeking competitive alternatives within the market, thus stifling innovation and competition in banking.
- When an SME switches between financial providers, the frictions experienced through the Know-Your-Customer (KYC) process delays the setting up of the new business account, frustrating both the customer and the financial provider.
The banks are happy with their customers being locked in. Why would they make it easy for SMEs to seek alternatives or better terms?
To overcome this resistance, the Australian government needs to mandate that the big banks upon explicit instruction from their customer, share their data, support the KYC process and allow transactions on the bank accounts.
The fintech and next-gen banking opportunity
As we see the rise of digital banks in international jurisdictions and how their banking solutions are helping SMEs to access adequate funding for business growth, it is becoming clear that Australia is lagging behind in terms of implementing policies that open up the market.
Fintechs are transforming the financial sector through the speed at which they adopt new technologies to create a better banking experience for SMEs.
There is great potential for fintechs to carve out the path for the future of banking for SMEs. The problem is that fintechs cannot gather momentum if policy-enablers are not in place that provide platforms for them to access appropriate information from another financial provider when taking on new customers. This means that they lose out on potential customers, and Australian SMEs are unable to obtain better financial products as a result.
SMEs need to join the open banking public debate
SMEs should invest time in contributing to the open banking argument and bring this issue to the attention of the Australian government. SMEs make up 97 per cent of all businesses in Australia – there is a whole army of voices from the SME community that could be creating platforms to advocate for open banking.
This issue is not only a policy concern, it is also a livelihood concern for SMEs, too. From the perspective of an SME, it should be an imperative to ensure that your business is being looked after by a financial provider who understands your needs and offers banking products that meet them.
Only when open banking becomes more prominent within our marketplace will SMEs be exposed to a wider variety of financial providers who can cater to their business models effectively.
The good news about the open banking argument is that it’s not going away – there are too many areas of our economy that would benefit from it.
Financial providers need competition within the market to be able to boost product innovation; SMEs need choices in their banking providers so that they get the best deal for their business; and fintechs need data to be made available so that they can grow their companies into smart and agile digital banks.
Open banking is not just a pipedream, it can be turned into a reality, yet the obstacles experienced by the current bank oligopoly need to be realised and flattened by regulators before change can occur.
Jost Stollmann is the executive director of Tyro Payments.