The Australian, March 28, 2018
Australia is rapidly running out of groups to admire.
Before the South African trip the Australian cricket captain would have been categorised as a person you could trust.
Now he has gone the same way as the politicians have over energy vandalisation and cash manipulation; bankers over bad practices; churches over child abuse; fake news and so on.
Trust in the pillars of our society is at low ebb.
The banking royal commission will underline that low ebb in the banking and investment community.
Yet this week we saw green shoots emerging in banking and investment as major players seek to repair a tarnished image or reduced influence.
Two great former icons, Commonwealth Bank and AMP, will have new leaders. The CBA appointment will see a new leadership team while the AMP may restructure.
But it was National Australia Bank CEO Andrew Thorburn who caught my attention as he started on the long road to restore banker trust in the small and medium business loans sector.
It will be not be easy and there is deep mistrust to overcome but to start the process in the middle of a banking royal commission and a cricket ball-tampering scandal required courage.
For the last decade or two NAB, along with most of the other banks, has been not been looking after small and medium sized business in the same way as in former decades.
The banks had standardised overdraft agreements that were an abomination giving them hideous powers, and they had little knowledge about their smaller and medium-sized business clients and simply looked for real estate security. Most had a vast array of complex products, forcing even good bank executives to concentrate on compliance rather than customer relations.
Most of the banks were the same but at NAB it was most noticeable because its great bankers of former years, including Nobby Clark and Don Argus, had made NAB the main player in the smaller and medium-sized business loan area. But all too often the business lending skills that NAB had built up had been consigned to the dustbin like tampered cricket balls. The big profits came from home loans and high dividends were the name of the game.
But looking forward, home lending is not going to be a major growth area. By contrast a number of Australian industries are set for a very exciting time and the market is yearning for a bank to once again emerge as an icon in the area.
NAB believes it can do this but it must undertake the tough task of rebuilding is skills base and changing the way it does business. The same will apply to other banks that want a major presence in the small to medium sized enterprise sector.
Actually the biggest first step was last year forced on all the banks by the government which instituted a requirement for fair standardised overdraft contracts.
For NAB the next step was a trial in New Zealand conducted by former ANZ executive Anthony Healy. NAB set up a series of small and medium business centres concentrating on selected geographic areas and specialising in the key industries in those areas.
The lending involved a lot more funding via customer invoices (cash flow lending) to levels established with the help of systems developed by NZ-based accounting software house Xero where NAB was an original shareholder. This gave the bank access to business cash flow statements and other aspects of the business it lends to. In former times bankers discovered that information by process called “kicking the tyres” which required managers of considerable skills and ability to assess a business. At that time such bank managers were community leaders. When they retired or were retrenched it left a void but today the “kicking the tyres” information comes via technology.
Instead of the bank asking for the accounts with the inevitable delay, it can now access detailed accounts in real time and so can be proactive.
Accordingly NAB often feels a lesser need to require the security of the entrepreneur’s residential house. And there is another change. In past lending models it was the function of the trusted accountant to prepare the accounts for the bank.
The NAB’s aim is to have the client, bank and accountant having the same conversation about strategies and funding. For that to work banking trust must be restored.
But the model worked in New Zealand and Healy has been brought back to Australia to repeat the exercise.
In Australia there are two parts to the NAB thrust.
The first is the very small enterprises including start-ups that are usually funded on personal credit cards plus family and friends funding. Cash-based loans of up to $100,000 are being offered at interest rates of between 12 and 14 per cent— much lower than credit cards.
The second and much larger thrust is to businesses that have turnover of between $5 million and $50 million. Under the proposed system NAB’s products will be greatly simplified and cover cash flow lending, interest and currency hedging etc. Meetings between clients in similar industries will be arranged.
A series of growth industries have been selected for special attention including agriculture and related activities, health care, education, and aged care. In some of these industries like healthcare NAB has invested in technology, which it is introducing to its clients. It is not a normal banking approach.
Not all the small business bankers will be able to adjust to the change but there will also be an increase in the number of bankers.
NAB is using the thrust as its selling point to overseas institutions.
In cricket, politics and banking, restoring trust and regaining icon status will not be easy.