More Debts Won’t Save the Big Banks — No More Responsible Lending
Josh Frydenberg seems to think that debt is the solution.
A means to get more money into more people’s hands and get the economy back on track. And he’s going to make that happen by scrapping ‘responsible lending’ laws. Taking enforcement of loans out of the hands of ASIC and handing them back over to APRA.
What this means is that lenders will need far less information to approve a loan. Which in turn should make it far easier for individuals or businesses to take out a loan.
We’ll have to wait ‘til later today for the actual specifics.
However, we can say for sure that these changes will shift more risk from the lender to the borrower.
Whether or not that is a good thing is debatable. Though I’m sure lenders, especially the big banks, will more than welcome these changes. Allowing them to do more of what they do best — loan money.
That in itself strikes an interesting tone. Especially as it comes just a day after Westpac copped the biggest banking fine — a $1.3 billion settlement — in Australian history.
In my opinion though, this lending reform won’t save the banks.
It may actually be quite the opposite.
Because these changes will pave the way for a new breed of lenders.
The next big thing in fintech
Two weeks ago, I talked about the big banks and their pitiful attempt to compete with Afterpay.
Both NAB and CBA unveiled new credit cards with no interest. A product that was aimed at younger Australians to go toe-to-toe with ‘buy now, pay later’ services.
Long story short though: it looks and sounds like a terrible idea.
It proved to me that the banks still don’t really understand what sets BNPL companies apart. Plus, it’s far too late for them to try and compete now.
Now though, with these loan reforms, the banks will have even more competition on their hands. And no, it’s not from the BNPL companies that have dominated headlines for so long now.
Instead, we’re starting to see the rise of ‘neo-lenders’. Small companies that are aiming to beat the banks at their own game and offer competitively priced loans. Many of which rely on technology platforms to make them faster, cheaper, and more accessible than a traditional bank.
More importantly though, they’re becoming increasingly popular…
You need only look at the rise of Wisr Ltd [ASX:WZR] to see the potential of these neo-lenders. A small-cap that exploded onto the scene over the course of 2019.
They certainly aren’t the only publicly listed neo-lender, either.
Earlier this week Plenti Group Ltd [ASX:PLT] made a rather unceremonious debut. Falling flat on their face due to ongoing concerns about a government investigation. A concern that has dragged down their share price from its IPO highs.
And while that may be a bad look, the fact that they listed at all goes to show there is an appetite for these stocks.
At the same time, the similarly named Lendi is also preparing for its own IPO as well. Another neo-lender that has the banks in its sights.
Then there is also Harmoney and SocietyOne — two more neo-lenders jostling for a spot on the ASX. Both of which are apparently waiting for the right market conditions, according to the AFR.
Well, with these new lending reforms, the time for these neo-lenders to strike is now.
Carving the banks to pieces
I firmly believe any changes to make lending easier will benefit these tiny upstarts far more than the big banks. They simply have far fewer overheads and complexities to deal with.
By focusing their efforts purely on lending, they should be able to offer a better product.
Whether that will be cheaper loans, faster loans, or just more reliable loans. I fully expect that these neo-lenders will increasingly eat away at the banks’ market share of lending.
Granted, there is room for a few caveats.
For instance, apparently these new reforms will come with tougher regulation for payday lenders. Which arguably is a good thing.
Whether or not we’ll see similar enforcement for neo-lenders is unclear. Again, we’ll have to wait for the specifics when the government releases them.
But, if Frydenberg’s goal is to get more people borrowing then more competition is a good thing.
After all, before this pandemic strangled businesses, non-bank lenders were booming. As the AFR reported at the end of last year:
‘For the first time more small business bosses are planning to sustain cash flow, pay wages and keep their doors open using non-bank lenders rather than their mainstream competitors, according to new analysis.’
Now, with these new reforms, I expect we’ll start to see that trend return.
Just another headache for the banks, but a potential win for these neo-lenders and their shareholders.
Editor, Money Morning
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