Give SMEs the banking system they deserve

July 13, 2017
Joseph Healy, The Australian

It’s been called the age of distrust — and we are right in the middle of it.

Over the past decade or so, in Australia and elsewhere, we have witnessed a growing lack of trust in institutions, and none more acute than distrust in big business.
In my 33 years in business, much of it spent at the so-called big end of town, I have never witnessed a time when the reputation of — and trust in — big business has been at such a low.
But to characterise this growing disquiet as a backlash against capitalism is to misunderstand the underlying nature of the distrust, which is not of capitalism as an idea but rather is due to the failure of both governance and market regulation. And a bit of human nature, too.
These failures are most starkly illustrated in the way our existing banking system works.
Here we have a case where capitalism in its true sense — which involves the risk of failure — is largely an illusion due to the “too big to fail” implied and explicit policy, and to prudential and regulatory settings, while the rewards of capitalism — big profits — are a reality.
The failure of governance is evident in a profession once defined by trust — the Latin term for credit is creditum, meaning to believe or trust — with the demise of the professional standing and core skills of bankers.
Big banks are now not so much about the traditional relationship practices of trust and depth of understanding, but more about selling — a never-ending push to upsize, to offer more products.
In some professions, “selling” has a negative connotation, particularly where there is a relationship of trust. After all, would you like your doctor or your dentist “selling” you more treatment than you need?
And yet our big banks are plagued by a culture of sales and cross-sale targets that are often not based on an understanding of customer needs.
These failures of governance are part of the reason we struggle to understand the large salaries paid to bank chiefs at a time when big banks are dogged by scandal.
The failure of market regulation is obvious to anyone who reflects on these matters. The oligopoly nature of the industry means our major banks make profits in excess of $30 billion a year in an economy of just 24 million people.
And then there is human nature. Our big banks have become accustomed to a system where senior executives are encouraged to take significant risk with other people’s money in the knowledge that if all goes wrong, then the comfort of the herd will shield the poor judgment of individuals.
Evidence of the perverse nature of these types of incentives is the unhealthy bias of our banks to household lending, now at eye- watering levels, which has the potential to expose the economy to significant systemic risk. Our banks now lend $1.6 trillion to households, compared to $250bn to small and medium-sized businesses.
In so many ways, our banks have developed the risk appetite of traditional building societies.
Of all the sectors of the economy impacted by the way our banks operate, none has been affected as much as small business, the engine room of our economy, which employs seven out of 10 Australians in the private sector.
These SMEs are hugely reliant on banks, but they feel the banks leverage their power to maximise profits, not provide the consistency and quality of service many would naturally expect and deserve.
This asymmetry of power in the relationship was the subject of an inquiry last year into banking by Small Business Ombudsman Kate Carnell.
I strongly support the 15 recommendations in the report and believe that if embraced by the banks they would be a good start to restoring confidence and trust.
Yet the predictable response from the sector has pushed the limits of Carnell’s tolerance, which explains why she recently noted the banks were very good at agreeing on the need for change — but only in principle.
There are several reasons, both policy and practical, why a number of the recommendations pose a challenge to the major banks.
At a policy level, an oligopoly will always act in defending self-interest, unless there is true competition or political intervention. And while it is true the big banks have copped some political heat lately, it is equally true the big four have developed very thick skins and employ huge lobbying power to resist change.
At a practical level, there may be deeper, more complex issues that are fundamentally related to the de-skilling and de- professionalisation of the industry, driven in part by the desire to build a “sales culture” and to achieve economies of scale, cutting costs and automating services.

The long journey of industrialising the operating model within many banks has seen core SME banking skills lost and a priority given to centralisation and standardisation of credit decisions, which, of course, is the antithesis of relationship banking.
It’s a world of one-size-fits-all.
The concern is that these trends in how major banks operate are set in concrete and cannot be reversed. If this is true, then it is only the emergence of new bank entrants that will redefine the service.
Finally, there are arguments that to adopt some of the 15 recommendations would limit the availability of credit to SMEs and increase pricing, a statement that merely highlights the need for real competition in the sector.
As Carnell has found, the time is long past to provide SMEs with the banking system they deserve, rather than the one they are stuck with.
Adjunct professor Joseph Healy is a former senior executive at NAB and ANZ, and the co-founder of Judo Capital, a financial institution established to service small and medium-sized enterprises.

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