The government will start grilling bank chief executives today to drive “cultural change” across the sector, but the focus won’t immediately be on the business community’s relationship with the big four.
Commonwealth Bank chief executive Ian Narev will be the first of Australia’s banking executives to sit down before a parliamentary committee today after the Prime Minister Malcolm Turnbull announced in August that Australian banking executives would be compelled to appear in front of the House of Representatives Economics Committee each year.
The Labor opposition is still campaigning vigorously for a Royal Commission into the banking sector, while the government has slated these meetings as an efficient way of affecting change.
Whatever the outcome of the questions posed to the banks, it’s unlikely small business issues will be front and centre. It’s expected that the focus will start on executive pay, profits and resolution processes for misleading financial advice.
But SMEs have their own specific concerns with the big banks, particularly around business lending – which fintech platforms are increasingly keen to capitalise on with offers of quick online business loans. Here are three key areas experts believe the small business community is eager to have explored.
1. Lending processes
In August the Small Business and Family Enterprise Ombudsman Kate Carnell appointed to review of small business lending practices through an examination of cases that were raised during the Parliamentary Joint Committee on Corporations and Financial Services.
At the time, Carnell told SmartCompany SME owners were being pushed away from the bank manager’s office and into online portals. The review will aim to weed out unscrupulous SME lending practices in which loan rules change midway through repayments.
“The sorts of cases we’ve got on our books at the moment are those where the bank has changed a rule around a loan, halfway through a loan,” she said.
Council of Small Business Australia (COSBOA) chief executive Peter Strong says that while Australia’s banking system is strong overall, the decisions that go into loan processes have the potential to significantly affect members of the community.
“We have a very strong system, but it needs to improve – people who suffer can’t be ignored because there’s not 10,000 of them,” Strong says.
2. Terms and definitions
Neil Slonim, independent banking commentator and founder of theBankDoctor.org, says there are a number of confusing terms and phrases used in the small business lending space, and SME owners would want to hear from the banks about why this is the case – and whether they can be simplified.
“The terms that are used to describe these fees make it hard for SMEs to understand the true cost of finance,” Slonim told SmartCompany.
“I would think one question would be: ‘Would you support a protocol that limits the number and type of lending fees?’” he says.
Between the big banks, current definitions and phrases used to describe indicator rates, base rates, lending margins and commitment fees vary. This leads to confusion about which option is the best deal, and what repayments can be in real terms.
“If you had a situation where the regulator said you can have no more than four fees for lending – and the terms that you can use are the same – right now, who knows if you can get [a loan] better somewhere else?” Slonim adds.
3. Support and communication
As the number of bank branches dwindle and face-to-face contact with bank managers evaporate, immense pressure can be placed on SMEs, especially when terms of a loan change.
Strong says the banking executives need to answer the question of what the banks do when they “get it wrong” when it comes to loan processes and decisions, because the cost of these can be significant, especially for family-owned businesses.
“When they get it wrong, the suffering is huge,” he says.
“They can’t just wipe their hands clean of it – you have to give people notice.”
Clarity around the process of helping businesses access funding could also help SMEs after a knock back, says Slonim.
“In relation to SMEs getting knocked back for loan applications – up to half of these get rejected, and most of them don’t really know where to go,” he says.
In the United Kingdom, banks are required to give lender alternatives if they can’t provide finance – which, while producing some risks, could direct SMEs to a source of funding.
“The thought is that the banks have an idea of the space,” says Slonim.
Strong says that while the Labor party should be careful of using rhetoric that suggests Australia’s banking system is “broken” in its commentary of the committee process, it is important that the banks step back and think about how actions trickle down the businesses at a local branch level.
“That’s all it comes down to – process and communication,” he says.