UK law now requires banks that reject a loan application from a small or medium business to refer that business to a panel of alternative lenders.
The Bank Referral Scheme was developed by the UK’s regulator, the Competition and Markets Authority (CMA), to inject competition into the SME lending market and reduce the dependency of small enterprises on the mainstream banking sector. Eighty percent of UK small business loans are provided by four banks: RBS, Lloyds, Barclays and HSBC.
More than one in four SMEs in the UK that apply for a bank loan have their initial applications turned down and just 3% of those denied loans say they have turned to alternative options to access the finance.
Under the UK Bank Referral Scheme, banks must offer SMEs declined for business finance a referral to a designated finance platform. Equally SMEs must give their permission for the referral to take place. A recent survey indicated more than 40% of SMEs would take advantage of the scheme.
Information from SMEs that request a referral will go to all the designated finance platforms. The three designated finance platforms approved by the CMA (Funding Options, Bizfitech and Funding Xchange) are all specialist business finance comparison sites. Each platform maintains its own panel of lenders that provide a range of finance options including online lenders, niche asset specialists and challenger banks. It is likely more platforms will be approved by the CMA over time.
The designated finance platform cannot charge the SME for the service but it can receive fees from the successful lender.
Should this scheme be replicated in Australia?
The need certainly exists. According to the Banjo Loans Small Business Finance Survey, for every 10 SMEs that applied for bank funding in Australia, two were successful, one was unsuccessful and seven chose not to proceed for various reasons, including cost and collateral requirements.
And the need in Australia is at least as great as in the UK, considering our big four banks control an even bigger market share than their UK counterparts. Awareness of alternative finance is also much lower here than in the UK (16% compared with 44%)
But will it happen?
A number of obstacles would need to be overcome, including:
- Convincing our regulators. The UK is more active in helping SMEs access business finance as evidenced by the range of activities undertaken by the British Business Bank to improve SME access to finance;
- Determining who would decide which parties would be approved as designated platforms and the way in which they go about the selection process. Currently there are several local platforms similar to the three approved in the UK including Valiant, eBroker and Loan Desk, but there are a number of others as well that would presumably want to awarded a designation;
- Answering potential questions from direct lenders, including: “Why channel rejected SMEs only to platforms that are basically loan brokers at the exclusion of the direct lenders?”
- Ensuring SMEs are confident that the platforms they are directed to will be fully transparent in disclosing brokerage and commission arrangements the platforms have in place with lender; and
- Perhaps the biggest hurdle would be getting the banks onside. To date banks have not shown much interest in helping those whose applications they have declined and they will probably come at this from the angle of: “What is in this for us?” Further, Commonwealth Bank and Westpac already have referral arrangements in place with On Deck and Prospa respectively, and they may not be keen on unwinding these.
Any measure that opens up funding avenues for SMEs that the banks can’t help should be embraced by all stakeholders, including the banks. It will be telling to see which, if any, stakeholders push for the implementation of the Bank Referral Scheme in Australia.