Hot Competition For Small Business

Big banks are responding aggressively to other small-business lenders, KPMG's Peter Nash tells Christine Long.

As the home-loan market flattens, financial institutions are focusing on growth opportunities among Australia's 1.2-million small businesses.

There are now 55 financial institutions offering more than 800 debt-finance products and business-transaction accounts for small businesses, according to a new report by KPMG.

Banks have advanced $29.8 billion in new credit to small businesses in the year to June, taking the total amount of outstanding credit to $78 billion.

Peter Nash, head of financial services at KPMG, tells My Career about the rules of attraction in the small-business banking sector.

MY CAREER: Competition in the small-business market has increased substantially with the entry of nonconforming lenders and other alternatives. How are the major banks responding?

PETER NASH: Quite aggressively. You are seeing a lot of innovation by existing players. Good examples are some of the advisory products around mergers and acquisitions and debt financing. Those are products that you typically see being provided by investment banks to the corporate end of the market and they are being reconfigured and downsized to suit the smaller business market. Some of the banks have also been developing specialised products. They will pick out a niche part of the market, such as pharmacies, or a special type of agricultural business, and they will tailor the product to suit their needs.

MC: The regional banks are picking up a bigger share of small-business deposits and debt financing. What is driving that trend?

PN: The regionals have been riding the back of home loan growth, exactly the same as the majors, so they are also looking at growth options. I think what the regionals would be hoping is that they can be more nimble in identifying niche segments than the majors and that they can trade off the back of some of the concern that exists around the major banks from time to time. But you are not going to be able to do that without a good product and good distribution, and that's their real challenge.

MC: Bank fees are still an issue for small business. Competition has led to some reductions in fees, particularly on the lending side. Will that trend continue?

PN: By and large, yes. If you look to the home loans sector, for example, the level of competition in that market has really driven down margins and it has forced lenders to be quite sensitive on fees as well. I think you will continue to see some of that behaviour in the small-business market.

MC: What is likely to be the next generation of product development?

PN: I think we'll continue to see quite a significant advance in the range of products delivered electronically. Complexity of debt products may advance as well - at the moment small-business debt products and transaction services are far more homogenous (than those offered to the corporate market). I think what we will see is a greater tailoring of products, rather than the one-size-fits-all approach.

MC: Finance brokers are playing an increasing role in the small-business market. Will we see them exerting the same influence in that market as in the home lending market?

PN: Brokers tend to operate particularly well in a market where the product that is being offered is relatively homogenous and doesn't involve a lot of very specific credit assessment. When you get into the smaller business market, you typically require more tailoring and some of the credit assessment processes become more complex. So while I think they will play an increasing role in the small-business market, at this stage it is difficult to see them reaching the type of market position they have in the home loans market.

MC: Customer service is being seen as the way to win in the personal customer market. How is that issue being handled in the small-business market?

PN: The level of customer service in the small-business market is an interesting issue that has to be resolved for the banks. You can go upscale, into relationship management models, but that tends to be higher cost. Or you can go down to the other end of the market, where most of the customer service is delivered by call centres . . . Because the needs of small business can be quite different from business to business, going to a call centre approach, which is where we've ended up for consumer finance, is less likely. I think ultimately we'll end up with some sort of hybrid that just gets that cost mix slightly better.