Banking on business

Australia’s 1.7 million small to medium-sized businesses are used to having banks devote their attentions elsewhere: to the big end of town and to personal banking customers. However, Australian banks and other lenders have 300 billion reasons to shift this attitude towards SMEs. Business lending grew a healthy 19.2 per cent in the year to March 2006 to $300 billion, almost 5 per cent faster than growth in personal lending. And it is small-to-medium businesses that are fuelling this growth. 

Fuelled by strong economic growth, the business banking sector is now a centre of attention for banks and other lenders. Bank of Queensland has increased its business lending portfolio by 23 per cent from April 2005 to April 2006. BankWest’s commercial division increased its balance sheet by 70 per cent in 2005 and is on track to do the same in 2006. BankWest has opened a suite of new business banking centres in economic growth areas on the east coast. The National Australia Bank has reported 20 per cent growth in business banking in the past 12 months.

New players, products and services are being created to attract and retain the business banking dollar. Previously under-utilised forms of financing such as debtor financing are also becoming more commonplace, rather than being seen as last-resort financing. So much so that companies that offer these more unorthodox lending services are being acquired by the major banks. Bank of Queensland, for example, has acquired Orix Debtor Finance. 

The strong performance of the business banking sector is more a reflection of economic growth than banks and other lenders doing anything out of the ordinary. ‘There is a lot of rhetoric and not much innovation,’ says Cannex’s business banking sector manager Sharon Lenon.

In its first business star ratings report, the financial services research group Cannex has given the major lenders a lot to think about. It even goes so far as to say ‘Major banks: look out’. The survey rates business term loans, overdrafts, bank accounts and credit cards and identifies the best lender in each category.

Credit unions and building societies fared well in the report, with the overall standout being Bananacoast Credit Union (BCU). The bank was established in a local pub in northern New South Wales 36 years ago by a group of banana growers who could not get money from existing banks. They decided to lend money to each other. BCU has 60,000 members and 21 branches. Its total assets have increased 24.5 per cent in the past year to $798 million, and 105 per cent over the past five years. In the Cannex survey, BCU is the only lender to receive a five-star rating across all four lending categories. 

Although still minute in comparison to the Big 4 banks, these smaller lenders are taking market share and profits from the four pillars. They tend to be lean, fit operations, small enough to be able to implement change quickly. For example, they are on a small enough scale to be able to upgrade IT infrastructure in less time, therefore able to push innovative new products and services to market in record time.

Big banks are rethinking their approach to business banking. After losing an estimated one-third of its market share (worth $700 million) over the past 10 years, the Commonwealth Bank is introducing a new internet banking system for business banking customers. Commonwealth Bank chief executive Ralph Norris has also announced plans to double the number of branches offering business banking services to 200.

Are better technology solutions and more branches enough for SME customers? The National Australia Bank, which has 24 per cent overall market share in the business banking category, is taking a different approach. The National has revamped its product range and de-cluttered some of its loan offerings.

General manager of business financing for the National Australia Bank Geoffrey Summerhayes says there has been ‘a bit of a tidy up’ on loan offerings. For example, it now has a Business Options product that has five variations; previously it had 40.

There is also the promise of more available credit for SMEs. The National has sped up the lending process for some customers, with its lenders now able to offer $1 million on-the-spot business loans.

However, Summerhayes emphasises the real shift has been in improving the relationship between banker and SME customer. He talks about a process of ‘re-engaging’ with clients. To do this, the National has invested in 12,000 hours of training for its business banking staff. The emphasis was on how to deal with customers. ‘Clients are interested in bankers that know their business,’ Summerhayes says. 

Relationships between banks and SMEs have traditionally been strained. That has led to a constant churning of accounts as disenfranchised small businesses look elsewhere for a better deal. In a recent Bank of New Zealand Australia survey, 28 per cent of Australian small businesses said they would probably change their banking service in the next six months. More than half of the survey respondents said they would leave the bank because of poor service (51 per cent) as opposed to fees (32 per cent) or interest rates (17 per cent). 

Managing director of RSP Recruitment Matt Lodge changed his business banking out of sheer frustration. His (former) bank (one of the Big 4) bounced a $170,000 cheque to the Australian Tax Office when the account became overdrawn by 70 cents. Lodge was tired of having a new business manager every three months and having to explain the business and its cash-flow cycles all over again.

RSP switched to Bendigo Bank, which he describes as ‘a progressive regional bank’. Lodge has now had the same bank manager for four years. ‘I like being able to pick up the phone and get hold of the person I want to speak to right away,’ he says.

RSP works with blue-chip companies such as Nokia, and has 350 contractors and a staff of 35 across Australia, Hong Kong and Singapore. RSP’s contractors and staff need to be paid weekly. Their 25 main clients work on 60-70 day cycles so RSP uses invoice debt financing to ensure cash flow. (Debtor financing is a cash advance against outstanding invoices.) 

One of the other reasons Lodge switched banks was to a find a more automated system for the debtor financing. Previously, in order to get the funds from the bank, staff would have to fax through hundreds of invoices to the bank, they would be signed off and then RSP would receive the funds. The funds could take days to arrive in RSP’s accounts. Now RSP’s invoices are emailed in one PDF and the funds arrive within hours, saving staff time and cutting the fax bill. 

Despite its less- than-stellar reputation in the past, debtor financing has become a significant growth area for banks. More than 4000 Australian businesses are using debtor financing. East & Partners estimates the value of the working capital finance market in Australia has grown to $36 billion.

Professional service firms in particular are taking up this financing option – often the firm’s clients are seen as better creditors than the firm itself. And as the business grows, so does the line of credit. Similarly, asset financing, trade finance, export debtor financing and working capital financing have been major growth areas. Companies such as Provident and Challenger are offering inventory financing that allows SMEs to borrow up to 90 per cent of the value of inventory.

A  co-founder of Emma & Toms, Tom Griffith inherited his banker from his father. Even before the fresh juice business began in 2004, Griffith was having long conversations with this banker about what the business would be like. Griffith and business partner Emma Welsh take a conservative approach to lending in an era, he says, ‘Where people are handing out credit left, right and centre’.

The pair’s cautious approach is perhaps a result of their experiences in a dot.com start-up in the United Kingdom. Griffith estimates that the two ventures in which he and Welsh were involved – one in media, one in the construction industry – burned through more than $50 million in cash. Now the only financing they have for their private company is for the vans they lease. 

There is increasing pressure on bank managers to lend more money to the business community. Adjunct professor of business at RMIT Amanda Gome warns of dangers ahead. The computer models banks use to decide to whom they should lend are based on 15 years of economic records. ‘We have had this booming economy for 15 years,’ Gome says, ‘so banks have to be careful to make sure their settings aren’t skewed.’ 

Rising fuel prices, a tightening labour market and interest rate rises will also increase the risk of over-leveraging. InfoChoice reports the Commonwealth Bank has the highest proportion of risky customers (12 per cent), an estimated four times the level of other banks. In specific sectors such as the wine industry, retailing and the building and construction industries, the percentage of high-risk customers is significantly higher.

In August this year following the Reserve Bank’s interest rate increase, East & Partners revised its three-year average growth outlook for business credit to 2.3 per cent. It predicts the SME and microbusiness sectors will be hardest hit by the rate increase because two-thirds of lending is secured by the family home.

The inaugural East & Partners Business Banking Sentiment Index, also released in August, surveyed 500 businesses across Australia. The index includes microbusinesses (which it classes as businesses that have turnover up to $5 million), SMEs ($5-$20 million) and lower commercial ($20-$100 million). Its findings reinforce the message that banks and other lenders have a long way to go to achieve the customer satisfaction they say they are striving for.
Overall, banks scored a Sentiment Score of 44.3 out of 100. St George Bank was the only lender to break though the 50-point threshold. The Sentiment Score is based on customers’ empathy, satisfaction, loyalty and advocacy. The most dissatisfied customers are microbusiness owners. ‘There is plenty of work going into acquiring new business customers at the moment,’ East & Partners’ senior consultant Paul Bartholomew says. ‘But less in keeping existing ones happy it would appear.’

Matt Lodge would like to see banks create new loans to genuinely suit the needs of SME customers. Even after seven profitable years, if Lodge needs $300,000 for an office refit, his residential house still has to be put up as collateral. 

The Cannex business banking report (free to download) points to the ever-present gap between what SMEs want and the products on offer.

Cannex’s Lenon says that one of the simplest ways banks could bridge the gap would be to revisit some of its fee structures. Says Lenon: ‘It’s those $40 overdrawn fees that drive people nuts.’

What’s ahead for business banking

• Increased investment by banks in online banking services 
• More customised online reporting, specifically tailored for SMEs 
• More pressure on banks and other lenders to innovate 
• Increases in debtor and inventory financing 
• More business banking branches 
• The increasing influence of the business banking broker

Reference: October 2006, volume 76:09, p. 42-44

This page is available online at:
http://www.cpaaustralia.com.au/cps/rde/xchg/cpa/hs.xsl/724_20102_ENA_HTML.htm