The alternative lending space is crowded — oversaturated, some may say — and in the U.S. and U.K., regulation is likely headed its way. Australia, however, may emerge with an alternative finance industry that is a bit different.
According to U.S. marketplace lender OnDeck, alternative lending is likely to be mainstream in Australia as soon as the end of the decade. Already, the industry is estimated to be worth nearly $5 billion, with analysts earlier this year suggesting that the Aussie alt-fin space could surpass its U.S. counterpart in terms of growth.
One of the latest entrants into Australia’s alt-fin sector is Reckon. Primarily, Reckon provides small and medium-sized enterprises with cloud accounting solutions, but now, it’s utilizing the data it has about small businesses to its advantage by partnering with alternative lending company Prospa to underwrite loans to its SME users.
It’s this access to small business financial data, explained Reckon Chief Operating Officer Dan Rabie and Prospa joint-CEO Beau Bertoli, that will hopefully give the two a leg-up in an industry that is quickly gaining the levels of competitiveness and crowdedness seen in other geographies.
“Online lenders are tapping into real-time business data from online accounting solutions,” explained Reckon’s Rabie, pointing to SME accounting platform Reckon One as an example. “This is transforming the credit risk analysis process. It’s bringing a new level of accuracy and insight into a business’ financial health, and they’re certainly benefiting from faster and smarter assessment procedures.”
Today, underwriting capabilities are the name of the game for alternative finance, regardless of location. It’s an area regulators are focusing on as they look to protect borrowers and lenders, and it’s a way players can gain a competitive edge.
But for Rabie and Bertoli, incoming regulation in Australia isn’t much of a worry.
“We are not concerned about regulation,” Bertoli stated.”If it helps protect the rights of customers and small business owners, it can only be a good thing.”
It’s a similar sentiment expressed by alt-lenders elsewhere. But in the U.S. at least, a more tangible threat of regulation has some alternative finance players worried about new rules that could change the way they operate.
Australia, however, isn’t yet feeling the heat from financial market watchdogs. A recent report by Deloitte examining the nation’s alternative finance market suggested that regulation should be shaped to support the growth of alternative finance. Plus, according to Sunil Aranha, CEO of Australian alt-lender ThinCats, existing regulations from the Australian Security and Investment Commission mean alt-fin players won’t have to worry too much about changes to their business practices.
Instead of a market threatened by regulation, Rabie and Bertoli still view the Australian sector as one that provides a crucial service to SMEs that is currently lacking among traditional bank offerings.
“It’s not always a case of ‘want,'” said Bertoli in explaining why a small business might turn to an alt-lender instead of a bank to access financing. “Small business owners usually approach their bank first when they need finance, before they look at alternatives.”
But strict property security demands and a long, cumbersome application are big turnoffs for small business owners, he added.
“Traditional banks face structural challenges that dissuade them from lending to many small business owners,” added Rabie. “An example being the difficulty in assessing creditworthiness of potential borrowers, which is being addressed in innovative ways by online lenders.”
Reckon’s ability to use its small businesses’ financial data to underwrite loans issued via Prospa provides lenders with a potentially more robust way of being protected. That’s because bank underwriting processes are outdated, Rabie said.
“Bank legacy systems can be inefficient, and the traditional credit assessment methods of requesting financials, bank statements and pay slips to assess a borrower’s creditworthiness can fail to provide a picture of the health of the actual business and lead to a decline rather than an approval,” the executive noted.
Another factor unique to Australia’s market is its late payments problem. Of course, small businesses getting paid late by their corporate buyers is an issue throughout the globe, including in the U.S. and U.K, but research released in March of this year found that Australia is actually the worst market for late invoice payments.
According to MarketInvoice — another alternative lender based in the U.K. — Australian businesses wait an average of 26.4 days past-due to get paid, worse than any other market analyzed. The data, researchers pointed out, corresponds with research recently released by Dun & Bradstreet that found that $19 billion is stuck in outstanding bills to businesses in Australia every year thanks to companies taking longer than the traditional 30 days to settle their invoices.
Bertoli cited this report in his reflection of Australia’s late payments problem.
“It’s no surprise that many small business owners use finance to manage their cash flow,” he said. But SMEs can deploy other tactics to protect themselves against late payments, Bertoli and Rabie noted.
Setting clear payment terms, offering early payment discounts, supporting electronic payment methods and following up on overdue invoices are all key for businesses that need to chase down what they’re owed, the executives said.
Still, alternative finance, they said, can offer an easy way to get the cash flow SMEs need to stay afloat. With heavy-handed regulation out of sight and access to data analytics technology to compete with traditional lenders, Reckon and Prospa seem confident not only in themselves but in Australia’s alternative finance sector.