06 March 2018
Fintechs move to provide an alternative to banks
By Kate Carnell
Last week I jointly released, with Fintech Australia and theBankDoctor.org, a research report that outlines the steps to be taken by fintech lenders to increase transparency and disclosure.
The report, Fintech lending to small and medium sized (SME) enterprises: Improving transparency and disclosure, analyses the different approaches to disclosure across the fintech industry, and makes recommendations on best practice and identifies commitments to action.
SME lending presents a huge opportunity for the fintech industry, so I commend the sector for its leadership in the financial services industry in addressing the needs of small business borrowers.
It presents a genuine alternative finance solution for small businesses where traditional banks are limited in their capacity to provide loans that are not secured to property.
Our particular focus in developing this report is improved transparency and disclosure. It is accepted the borrowing costs of fintechs will often be higher than banks, as loans are secured against business activities and not ‘bricks and mortar’, but the total loan costs – the effective interest rate – is not always clear.
This lack of transparency has made it difficult for small businesses to compare products offered by different fintechs, or to compare products offered by fintechs and banks.
To make informed decisions on the best product to meet their needs, small business borrowers must be able to compare total costs, understand the obligations if you exit early and the penalties if payments are missed.
This is just the first phase of a major piece of work. We now have a number of important action items to finalise and present by June this year.
The fintech sector has agreed to develop a Code of Conduct, which will include best practice principles and specify the comparative measures, such as annual percentage rates and total cost to potential borrowers. The sector will also review its contracts to make sure the unfair contract terms legislation has been complied with across the industry.
My office will work with independent SME finance expert, Neil Slonim from theBankDoctor.org to develop and promote a ‘how to’ guide for small businesses interested in borrowing from a fintech lender.
The Glossary of Common Lending Terms, which is included in the report, is a good first step towards driving a consistent industry-wide approach to the use of these terms. This should initially make different contracts easier to understand and compare.
The key to all this work is to provide small business borrowers with the information they need to deal confidently with fintechs, and show them that fintechs are a trusted alternative source of finance.
I applaud the efforts of the fintech sector to move to industry-led self-regulation, and I will keenly monitor progress against the resolutions in the report.