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RBA ‘unclear’ on benefits of alternative SME lenders

by James Mitchell4 minute read
RBA 'unclear' on benefits of alternative SME lenders

The Reserve Bank of Australia says that while alternative lenders inject competition into the SME finance market, there is no evidence that these new platforms are reducing financial constraints for small businesses.

Speaking at the Australasian Finance and Banking Conference in Sydney on Wednesday (13 December), RBA assistant governor (financial markets) Christopher Kent outlined how marketplace lenders have evolved in the Australian finance sector.

“Marketplace lending platforms provide debt funding by matching individuals or groups of lenders with borrowers,” Mr Kent said. “These platforms typically target personal and small business borrowers with low credit risk by attempting to offer lower-cost lending products and more flexible lending conditions than traditional lenders.

“It is unclear whether marketplace lending platforms are significantly reducing financial constraints for small businesses. Unlike innovations such as comprehensive credit reporting which have the potential to improve the credit risk assessment process, marketplace lenders do not have an information advantage over traditional lenders.”

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Mr Kent noted that, as a result, marketplace lenders need to manage risks with prices and terms in line with traditional lenders.

“Nevertheless, these platforms could provide some competition to traditional lenders, particularly as a source of unsecured short-term finance, since they process applications quickly and offer rates below those on credit cards,” the RBA assistant governor said.

While alternative financing platforms are growing rapidly, they are still a very minor source of funding for businesses, including in Australia. But the federal government has made clear its desire for more alternative lenders in the market.

Treasurer Scott Morrison has introduced legislation to lift the prohibition on the use of the word “bank”. He is eager to see Australia move towards online lending models that have grown popular overseas.

Speaking at the Financial Services Council in Sydney on Monday, 30 October, Mr Morrison pointed to the UK, where authorities similarly removed the prohibition on the term “bank”, which led to a flood of new online lenders into the market, forcing the major banks to slash their interest rates and product pricing.

The Treasurer said: “Almost 60 new banks have piled into the UK market since regulatory changes in 2013, including digital banks like Monzo, Tandem and Starling — banks that sell themselves as ‘mobile first’.

“The future of our banking sector, under this similarly reduced licensing burden, is rather exciting.”

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James Mitchell

James Mitchell

AUTHOR

James Mitchell has over eight years’ experience as a financial reporter and is the editor of Wealth and Wellness at Momentum Media.

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