In stark contrast to the ongoing Financial Services Royal Commission, at the recent Altfi Australasia Summit in Sydney, there was an impressive and quite rare gathering of over 400 finance people, investors, entrepreneurs, policy-makers and commentators from around Australia, the US and Europe getting stuck into solving our chronic finance problems.
One of the hot-button issues debated was the recent finding from the Reserve Bank of Australia on the Availability of Business Finance that:
Despite finance generally being available, growth in business borrowing has been relatively moderate, suggesting demand has been soft.
Meanwhile, wage rises in the private sector aren't doing too well and high quality job creation is a bit questionable.
“Business” is not one thing
Media coverage about "Business" in Australia is polarised between on the one hand seeming to include all business but really meaning "Big Business" and then on the other hand when talking about SMEs really meaning sole traders and very young start-ups. Businesses in the middle employing most of us are forgotten!
Large Corporates, as represented by the well-resourced Business Council of Australia, are in a different universe. Their agenda is not the same as most businesses that employ 2 out of every 3 Aussies in the private sector. Sole traders have very different needs from mid-sized businesses. And so on.
Kate Carnell, our Small Business Ombudsman who has recently launched an Inquiry into Affordable Capital for SME Growth, puts it this way:
Economists and regulators have for years treated small business as smaller versions of big business which they certainly are not.
We need to start to understand this and get under the bonnet of "Business". We need to figure out what is required to ensure the creation of worthwhile jobs and just as importantly decent pay rises.
Challenging our Big Banks
Along with a number of Fintech and other alternative credit providers, two Challenger Banks are emerging in Australia to fill the void left by our Mortgage Banks and service smaller and larger SMEs: Tyro and Judo Capital (awaiting its licence to take deposits but open for lending now). A good discussion was held at the summit with plenty of audience Q&A.
Dermot Crean (Allbridge Capital, moderator) opened discussion by saying that bank employees who understand how credit decision systems work are getting fewer in number.
David Hornery (co-CEO, Judo Capital) said that banks exaggerate how much they lend to SMEs. The official figure is that 9 out of 10 SMEs that apply get their loans approved by the banks, but this is misleading as many never make it to the application process.
Bronwyn Tam (Head of Product, Tyro) pointed out that the market is highly varied and that there is no definition of SMEs. They’re all very different. She added that merchant cash advance are popular as they provide flexibility.
Listening to recent BCA lobbying for "Business" and reflecting on the Altfi summit, we do need a proper debate on the needs of "Business" in Australia but not solely led by self-interested Large Corporate CEOs. They are conflicted - a tax cut would turbo-charge their share prices and as a result their long term incentive schemes.
Our strong belief is that there is a lack of focus on our family-owned/privately owned businesses that can and will invest for the long term and are the biggest driver of job creation.
As concluded in Canberra's latest Innovation System report:
- High Growth Firms are likely to be Medium Sized, ie with 20-199 staff
- 46% of jobs between 2004 and 2012 were created by 11,000 High Growth Firms.
The latest business credit statistics from the RBA show once again hardly any growth in lending outside the Large Corporate sector.
- 78% of Business Lending in Australia has been to the Big End of Town
- 37% has gone to….err…Finance & Insurance!
At the summit, Neil Slonim, co-author of a report into Transparency & Disclosure Practice in Fintech Lending, took the line that there needs to be more transparency. Currently borrowers are getting put into loans that aren’t in their best interests because brokers are getting offered significant sums by Fintechs.
Mike Cutter, Equifax, highlighted a supply side challenge in business lending given a slowdown in new credit growth. But is this more indicative of the stranglehold that our major banks have on SME lending?
In his closing address at the summit, David Stevenson (Altfi editor and Financial Times commentator) pointed out that Australia like the UK has a banking oligopoly and that’s a shame. But he stressed that onlookers should watch out for new players that are attacking the oligopoly.
So what's holding back job creation and wage rises?
We believe that it’s not about tax cuts. Dividends from the bulk of Australian businesses are taxed in Australia as Income Tax with an offset for any Corporation Tax paid. There may be a case for attracting overseas capital but this needs to be tied to making Australian workers better off.
Our focus should be all about re-shaping our mortgage-driven finance system to support the real job creators. There is plenty of capital in Australia but the system isn't working, as highlighted at the Altfi summit.
Many of these same problems are experienced in other countries, driven by the Basel international regulatory capital framework for banks.
In the UK, the Treasury Committee is currently holding an inquiry into SME Lending. The non-bank SME finance market in the UK is much more developed than Australia's. Government has been much more pro-active in encouraging the development of an SME eco-system.
Despite this, there is much more to do and the problems are very similar to ours. Australian policy-makers could fast-track much needed improvements in our SME finance market by studying closely the findings from this inquiry.
No finance, no growth and that includes wages and jobs.