Australia's fintech industry will 'self-regulate' after an important report found some SME borrowers felt deceived by fintech lenders' practices.
Facing calls for transparency on interest rates and fees, Aussie fintechs have agreed to self-regulate and abide by a code of conduct.
The code will require lenders to disclose their interest rates, disclose additional fees and present their loans in a standardised way that allows borrowers to compare them.
The code will also, it is hoped, weed out some of the nastier lending clauses that are hidden in borrowers’ contracts. These have included clauses that require borrowers to pay out the interest they contracted to pay over time, even if they repay their loan early.
The agreement comes after several weeks of negotiation between three parties: the small business ombudsman ASBFEO, lobby group FinTech Australia, and SME advocate the Bank Doctor, and in response to an important report published by the three groups.
The 57-page report, entitled ‘Fintech lending to small and medium-sized enterprises’, found fintechs were doing important work plugging a funding gap left by the banks. Tighter lending restrictions introduced since the 2008 financial crisis together with the (relatively) small profits SME loans generate has meant banks have mostly vacated SME lending in Australia. The banks' departure has created a void for fintechs to fill, the report noted.
Fintechs filling this void has broad-based support from both major political parties, the report found. Thus the government had rolled out supportive legislation, including a regulation-free “sandbox” for fintechs to play in, and laws mandating an open banking standard, a major demand from fintech companies.
Problems identified: commissions, APR disclosure, repayment flexibility, online calculators
But it also highlighted problems. These included the fact only 18% of fintechs disclose their APRs, which is the interest rate most meaningful to borrowers. Worryingly, the report implied that fintech companies had in some cases been deceptive in presenting their total costs. This included providing online interest rate calculators that excluded important fees.
Commissions fintechs pay to introducers was another problem, the report said. Fintechs often pay commissions, sometimes as high as 6% of the loan amount, to those who introduce and promote their loans (usually accountants and brokers). These payoffs are problematic because they occur behind the scenes, meaning borrowers rarely know that the accountant or broker advising them is partial.
Another concern was that 58% of fintechs were unwilling to give repayment flexibility. The report said the lack of flexibility on repayments was particularly worrying for SMEs as they were often uncertain of when they’d next get paid. But the lack of flexibility had been a boon for merchant capital advancers and invoice financiers which provide services offering this flexibility, the report said.
The report also noted that the Australian fintech industry was divided on the need for reform. Some fintechs were reluctant to do the bare minimum (the report did not specify which companies) while others were supportive of regulation. But most fintechs surveyed said that they had bigger problems than regulation, like the costs of customer acquisition and low industry awareness among SMEs.
“Fintech lenders have an important role to play,” the Bank Doctor Neil Slonim, one of the authors of the report, told AltFi.
“If you want to borrow less than $100,000 and you have no security it’s hard to get a bank loan. And if your trading record is not very good, it is even more difficult. Also, banks can take a long time to make decisions whereas fintech lenders can have the money in your account within a couple of days."
He added that SME borrowers tend to be time poor and are reluctant to pay lawyers to review loan contracts. This meant many SMEs only come to fully understand the fees and loan conditions once it’s too late. He also took issue with the lack of transparency on the commissions that fintechs offer, which, he believes, can lead to outcomes which are not in borrowers’ best interests.
“At the moment the problem is complex contracts with different definitions. We believe that many of the contracts do not comply with the unfair contracts legislation. We are very pleased that the majority of fintechs are willing to address these issues.
“Our experience is that the majority of medium to large fintech companies realise that if they don’t go down this path their capacity to grow… will be diminished and the government will legislate.”
She also raised the possibility of lobbying the Australian government to bring in a business bank, like the British Business Bank, that helps pool the risk for fintechs providing loans to SMEs.