The big four banks are facing competition in the small business sector with the launch of Judo Capital, which is planning to tap into a $60 billion shortfall in lending to SMEs.
The SME focused challenger is on track to raise over $100 million and has applied to become a full bank under the Australian Prudential Regulation Authority’s regulatory framework.
Judo is co-founded by the former head of National Australia’s business bank, Joseph Healy, and NAB alumni David Hornery.
It is looking to tap into demand for lending in the market that is not being met, with a Macquarie bank 2015 report identifying a shortfall of $60 billion for the SME segment.
Small business and family enterprise ombudsman Kate Carnell says Judo’s launch is well timed with the lending shortfall continuing to grow.
“There is no competition,” Ms Carnell said. “The big four banks have 80 per cent plus of the SME lending market and they mostly don’t lend except if it is secured against property and that means access to capital is very difficult for many SMEs.”
Judo is heavily influenced by the challenger banks in the United Kingdom which emerged following the global financial crisis including Aldermore, Shawbrook and Oak North.
“We saw a huge opportunity to go back to relationship-centric banking, which is banking as it used to be and banking as it should be,” said Mr Healy.
Judo will focus on the ‘four C’s of banking’ the character and risk profile of the consumer, the cash flows in the business, the existing capital base and the collateral which is security to support the lending.
“There has been a growing level of dissatisfaction of small to medium size businesses with the service proposition they have been receiving from banks, a one size fits all cookie cutter approach to lending with a heavy bias to real estate based lending,” said Mr Hornery.
The bank will operate through a mobile banker workforce who will go to a customer’s premises rather than through a branch network.
“At a practical level we will turn everything around in five days, we have a judgment-based lending service that looks at the complete business picture,” Mr Hornery said. “It takes one person to say yes and two people to say no. The banker sitting across the table from the customer is actually empowered to make decisions.”
Judo defines SMEs as businesses with under $20 million turnover and Mr Healy said Judo would be very different to fintech lenders.
“While we absolutely have cutting edge technology, we don’t define ourselves by that technology we define ourselves by the relationship proposition,” he said.
Judo raised just under $20 million in seed capital to launch as a non-bank financial institution and Mr Healy said it was on track to raise “well in excess” of $100 million by mid-April with the intent of becoming a fully licensed bank this year.
Judo is opening its headquarters in Melbourne with 40 staff and will expand to New South Wales and then into Queensland.
“There is a national footprint we are aiming for,” said Mr Healy.
The ongoing Financial Services Royal Commission provides an added emphasis to Judo’s ambitions.
“We are very clear at Judo that our purpose is to become the most trusted bank for SMEs in Australia,” said Mr Healy. “What the Royal Commission is doing is unveiling a whole range of issues that go to the heart of trust and a significant deficit of trust. In many ways, we are blessed by timing here.”
SME advocate Neil Slonim, the founder of the Bank Doctor, said any new form of competition in the SME sector is welcome given the absolute dominance of the big four banks in the space.
“A challenger bank like Judo is not a fintech or a big four bank but what they are trying to do is the best of both worlds, so they are pursuing a traditional relationship model, which is people, at the same time they don’t have the expensive legacy network like the banks have,” said Mr Slonim.
Mr Slonim said there were challenges for Judo with a higher cost of funds.
“It’s highly unlikely they will be able to win business on price,” he said “I would expect them to be more expensive than the big four. I don’t think people will be going to Judo because it is cheaper, they will be going to Judo because they want the personal relationship management style they used to get in the good old days.”