The low interest rate environment and technology change are combining to change the dynamics of banking growth towards small business lending.
Perhaps not surprisingly China is showing the way but here in Australia we are watching a new bank, Judo Bank, emerge to concentrate on the growth area. Most of the top executives of Judo come from the National Australia Bank.
But last year, seeing the danger of a “NAB-based” new rival, NAB swung the CEO of its New Zealand operation, Anthony Healy, into the top business banking post. He is already gaining market share as NAB embraces similar technology and systems to China.
Healy was the top internal candidate for the NAB CEO post, but he was pipped by the outgoing CEO of Royal Bank of Scotland, Ross McEwan.
The other three major banks are also looking to expand in the small business growth area.
The China story is remarkable and shows what the new technology can deliver.
According to the South China Morning Post Jack Ma’s MYbank over four years has lent 2 trillion yuan ($US290 billion) to nearly 16 million small companies, with a default rate of one per cent.
Using real-time payments data and a risk-management system that analyse more than 3000 variables, borrowers apply with a few taps on a smartphone and receive cash almost instantly if they’re approved. The whole process takes three minutes and involves zero human bankers.
As MYbank and its peers crunch reams of new data from payment systems, social media and other sources, they’re growing more comfortable with smaller borrowers that they previously shunned in favour of state-owned giants.
Here in Australia we have not gone that far, but NAB has started using modern cash flow monitoring technology.
Last May, under the heading “NAB leads changes that could produce a small business breakthrough” I explained that for a generation the lead weight in medium and smaller business lending has been the bankers’ demand for security over real estate – usually the family home. If the business fails, the family home is lost.
Spouses and partners of entrepreneurs are increasingly saying “No” – the family home must be separate.
The new accounting systems being operated by Xero and MYOB have changed the game and now produce cash flow information (and forecasts) on a real-time basis, which can be monitored both by the business and the bank.
So NAB, albeit on a small scale, is now lending on cash flow without real estate security or guarantees. Suncorp has joined them.
Clearly the Chinese have taken this process further. It’s perhaps ironic that the success of Ross McEwan will depend on how well his rival for the CEO job, Anthony Healy, performs in this new era.
And Judo will be chasing NAB clients, although its origins come from an old-fashioned approach to small business lending. The two drivers of Judo, Joseph Healy and David Hornery, were top NAB executives and began discussing the idea in a pub around 2013-14 while Cameron Clyne was CEO of the NAB (Clyne retired in 2014 only to take on a tougher job as chairman of Rugby Union Australia, which thrust him into the Israel Folau affair).
At the time Joseph Healy was divisional CEO of NAB business banking and David Hornery was executive general manager of NAB’s corporate, property, agribusiness, health and government operation.
They were at the core of the NAB business but were frustrated by the fact that the banking small business service proposition was based on “How much is your house worth?”.
And so they left the bank and began recruiting NAB executives and others who had the same belief and the skills to form relationships that they believe small business needs.
Accordingly, the backbone of Judo is ex-NAB people including:
* Alex Twigg, Judo’s chief information officer. He was CEO of NAB’s UBank, the world’s first purely digital bank.
* Tim Alexander, Judo’s chief operational officer, had a string of NAB executive appointments but was CEO of the NAB subsidiary covering specialist banking for 25,000 healthcare professionals.
* Chris Bayliss is chief financial officer. Bayliss is a 32-year career international banker with senior appointments in the NAB group and international banks.
* Jacqui Colwell is Judo’s chief risk officer and at NAB was responsible for the risk profile for Personal Bank. This division of NAB comprised retail banking, micro and small business, broker channels, and digital and direct business
That’s a big part of the cream of NAB talent and Judo claims that it will have the best technology and not be held back by the big bank legacy systems. However at the core of the Judo approach is personal relationships, which is different to the China pattern.
On the board of Judo are former Australian Treasury secretary John Fraser, with former federal small business minister Bruce Billson.
Judo has just raised $400 million in equity capital from international institutions, plus the Myer family. Local institutions were absent.
Given that margins are so thin in home lending, this is the war that will determine the future of Australian banking.