Inadequate regulation of fintech leaves Australian SMEs at risk
By all accounts, Australia is poised to become one of the world leaders in fintech. We’re an incubator for new ideas and experimentation. Despite this, an inadequate regulatory environment and lack of support for small-to-medium enterprises (SMEs) continues to put the fintech industry, and the small business community, at unnecessary risk.
The stakes for Australia’s economy are high. Small businesses, which employ half of the nation’s workforce and make one fifth of its domestic product, remain vulnerable to the loan shark practices of fintech bad guys.
That’s true even with a new voluntary code of lending practice that Fintech Australia recently put in place to self-police albeit not all lenders are even members of the organisation. The code claims to standardise transparency and create a mechanism to resolve disputes, but only six fintech companies have signed on and it has no real teeth.
While the code includes a pledge to lend only to SMEs that have the capacity to repay, there is no mechanism to stop loans to SMEs that have outstanding loans from other fintechs – a practice known as “stacking.” Nor does the code address some lenders’ insistence on repayment by relentless direct debits that can drive SMEs out of business. Finally, it’s not clear whether the code can be enforced or is merely a set of guidelines.
In other words, we’re not signing up because it is not a legitimate attempt to enable responsible lending – it’s an empty gesture for a quick PR hit. As mentioned it does not apply to non-Fintech Australia members. Furthermore, its definition of an SME loan excludes the majority of the lending in the SME arena.
In effect, then, the problems that brought on the code still exist. As an experienced SME lender, we are gobsmacked how anyone can suggest that the majority of SMEs will understand the real cost when a loan is offered on a factor rate (shouldn’t it be as simple as the question, what is the interest rate after all costs?). In fact, reports of ASIC’s recently completed review of one of the most prominent fintech SME lenders are notable for absenting lender’s factor rates from review and thus excluding what is arguably the most problematic and damaging part for SMEs from scrutiny.
While fintechs can still serve startups as an excellent alternative to traditional banks, particularly if they’re small- or medium-sized, some startups will likely still fall prey to unscrupulous practices. We have seen SMEs who have had their cash flow drained by frequent debits they could not afford and literally have to close up shop, and, even more unbelievably, it was accountants and other financial advisors who recommended these kinds of loans for their unsuspecting clients.
So the regulatory environment needs to be strengthened, and Australia needs to provide more education and better support for small businesses. The reality is, it’s easier to start a new business in Australia than it is to get a driver’s license, and that’s not a good thing.
There’s a big difference between having a good business idea, and having the business acumen to get it off the ground. More than half of SMEs close within the first three years, and the most common reason is financial hardship.
There are some simple steps that the government could take to address these problems. It could apply the National Credit Code for Retail to SMEs, so they would come under its protections, at least for loans under A$100,000. These include a bar on extending credit to consumers who are likely to have difficulty making payments. Further, the code of lending practice should be amended to forbid loan stacking and mandatory debits. It could remove prepayment penalties, why should an SME suffer to paying a loan out early. Isn’t this a sign of a well run business?
The government should also support SMEs with a licensing and education. With such a program, new entrepreneurs could have a better understanding of money, marketing, cash flow and lending – including the ability to spot a bad loan a mile off.
It’s crucial because SMEs serve as the economy’s engine. If too many SMEs go belly up from poor business decisions, including bad loans from shady fintech lenders, it affects a fundamental base of our economy and it hurts Australia’s reputation as a fintech innovator.
Our fintech industry now ranks among the top ten in the world. If we pay attention to the small businesses upon which it is built, Australia can further strengthen its reputation. Everybody wins: The SMEs, which will be less likely to go out of business; the lenders, who will be less likely to lose money on bad risks; and the nation, which will continue to thrive as a world leader in fintech.