By: Darren Lelliott
In 1995 I was studying for my MBA while working for the National Australia Bank in lending roles so it seemed rather natural that I should choose as my dissertation subject “A discussion on the regulation and deregulation of the home loan industry in Australia.”
After all at that time strengthened regulations over home lending were still reasonably new. Similarly independent mortgage broking still only had a small impact on the home loan market with less than 10% of home loan finance originating in any way other than through bank branch networks.
Within that dissertation I made the prediction that mortgage broking would continue to grow in significance as a source of home loan origination. In 2013 mortgage origination via mortgage brokers accounts for approximately 50% all new home loans in Australia. Were my thoughts in 95 prescient or a simple extrapolation based on logic?
It was the latter because the logic is so self-evident:
1. Home loans can be complicated for most consumers, as such they would prefer to have someone trained in the area give them advice;
2. Bank employees are naturally going to be biased to their employer, and their own performance targets, therefore an independent broker is more likely to provide the best product advice and selection;
3. Time is precious and while seeing each bank might take 1 hour of interview plus loan form completion see a broker can be the equivalent of seeing 10 lenders but with only one interview and loan form completion; and
4. All of those benefits come at little or no direct cost to the consumer as brokers are paid commissions by lenders.
For SME finance it is as though I am looking at home loans 18 years ago again. Finance broking for SME finance accounts for less than 10% of all new finance today, and yet the same simple logic as to the benefits for SME borrowers as home loan borrowers applies.
I have interviewed many accountants and SME business owners about SME finance and found that;
- approximately 95% of SMEs will go straight back to their existing lender, or the business’s transaction bank, for any new finance.
- less than 10% will review alternatives and that these are mostly because their current bank has declined the new finance application.
When asked why the reasons are:
- SME business owners are time poor;
- Loyalty to the bank; and
- Complexity and difficulty in moving other established banking services to a new bank.
At the same time 90% of SMEs and their accountants surveyed did not believe their bank would show any loyalty to them if tested and almost 100% believe their lender does not try to win their business.
With SME finance behaviour, as described above, once that business is embedded with a lender or business transaction provider (bank) then they are almost certain not to go anywhere else for future finance. Thus SMEs have self-imposed a lack of competition in lending practices. A lack of competition leads right back to the problems SMEs describe so the issue is circular.
My prediction is that SMEs, and their accounting advisers, will start to realise this circular behaviour and that the way to break the pattern is through the use of independent finance brokers.