Banks, big tech, and the battle for SME lending: A new role for eCommerce data?

By Peter Lord, Co-Founder and CEO of Codat

It’s old news that competition in the SME lending sector is starting to heat up.  At the March AFR Business Summit, Bendigo and Adelaide Bank’s general manager of business banking, Jim Sarris, revealed a price war has broken out in the business lending market declaring larger banks are writing loans below their cost of capital.

It’s also no surprise that automation and access to third party data are at the heart of transformation efforts across the business bank sector.  Australia is leading the charge on digital financial services for SMEs. With the highest proportion of SMEs in the world selling via digital channels, and three out of the big four banks already offering unsecured loans and overdrafts up to $250k.

New to bank customers that are willing to share their financial data directly from their accounting package can have a decision fast tracked to within 24 hours.

However, Codat recently surveyed 500 Australian SMEs, 20 per cent of whom said they didn’t use an accounting platform now in the business’s first year, and a further 31.8 per cent who still don’t. With 2.6 million SMEs in Australia and 475,000 new businesses starting each year, a significant proportion of SMEs are therefore not eligible for capital from banks during the most critical stage of their growth.

When banks underwrite based on accounting data, they typically require financial statements from the previous year, with year-to-date management accounts.  So for newly established businesses, this financial data simply might not be available yet which results in most banks turning down a large cohort of customers experiencing strong growth in sales

For example, a new eCommerce business selling t-shirts on Shopify is likely operating for at least a couple of years before they can produce a full set of financial statements and will likely resort to a small non bank lender that also has minimum revenue requirements and will rely on a Directors Guarantee to underwrite a loan.

And now big tech is entering the market 

eCommerce giants like Amazon, Shopify and Stripe are now live in Australia and mopping up these customers by offering business lending products to a whole market of new businesses that mainstream banks are unable to serve. Shopify Capital underwrote $393.2 million in cash advances and loans to merchants in the fourth quarter of 2022 alone, which is an increase of 21 per cent since the prior year. The program has grown to $4.7 billion in cumulative capital funded since launching in 2016 and they are just getting started.

Similarly, Amazon is expecting to double its loans to sellers this year, partly by making its underwriting process more stringent. It’s estimated that Amazon’s business lending arm served over one million sellers last year, with transaction volumes of a supposed $50 billion that generated more than $1 billion in economic profit. Despite the state of the economy, Amazon anticipates a loss rate of just 1.34 per cent on over $2 billion in deployed capital. Comparatively, PayPal has become the biggest non-bank lender with $54 billion in assets in 2021 alone. The value proposition for the SME market is clear.

For these tech giants, these programs are viable because the businesses they are lending to already have granular data about their sales, customers, and how much they are spending on their products. This data is not easily manipulated, as it can’t be fudged in the same way as accounting systems- in other words, it’s immutable sales data similar to data in a bank account as opposed to user-entered invoice data in an accounting platform  The capital is also offered at the point of need, which is more convenient for the business owner.

So, how can Australia’s traditional banks get a slice of the pie?

Traditional banks and lenders are already showing signs of wanting to incorporate data from eCommerce and payments systems into their underwriting process.

Universal APIs can effectively connect these lenders to the eCommerce and payments systems used by SMEs via a single integration thus providing access to useful data such as sales volume, customer lifetime value, and payment promptness. With over 70% of the Australian SMEs we surveyed saying they used some kind of payment software, there is a huge wealth of data waiting to be tapped into.

Australia’s traditional banks and lenders have the advantage of distribution – they already have the attention and trust of Australia’s small business population. For the first to market, this could be an opportunity equal to that of big tech players, which would have a significant impact on the economy, a good news story that is badly needed during this torrid period for the banking sector.

With business formation in Australia growing by almost 20 per cent per year to more than 2.56 million businesses, there has never been a more critical time to invest in the SME sector. By leveraging eCommerce and payments data to drive financial inclusion, Australia’s banks can help to ensure that no business is left behind.