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Right now, in Australia, small businesses have it tough. They’re dealing with an economy in recession for the first time in thirty years and the aftermath of a global pandemic that’s squeezing international markets. That reality is causing cash flow problems and plenty of uncertainty in future projections and planning.
But unlike many other places in the world, Australian SMBs enjoy a particular advantage: neobanks. They’re a growing part of Australia’s lending and banking space that’s sprung from its burgeoning Fintech scene. And for SMBs, they may be the key to long-term survival, growth, and prosperity. To explain why, here’s an overview of neobanks, including what they are and the pros and cons of using them.
What’s a Neobank?
A neobank is a new, all-digital alternative to traditional brick-and-mortar banks. They offer many of the same services and handle common financial transactions, but leverage technology to do the work completely online. They’ve sprung up to challenge traditional business banks in Australia, many of whom have neglected to develop digital options for their customers.
There are several reasons they’re growing so fast here, besides latent demand. One is a favourable regulatory environment. Back in 2017, Scott Morrison (then serving as treasurer) spearheaded a push to modernise the Australian banking market. As a result, the process of getting a banking license here was streamlined as a way to increase competition.
And because Australia’s already a hotbed of Fintech development and has an education system already churning out highly-trained financial technology experts, it didn’t take long for that competition to arise. By 2020, the country was home to no less than five major neobanks, more than doubling Australians’ banking options in just two years.
Why SMBs can benefit from Neobanks
There are several reasons why Australian SMBs can benefit from neobanks. The first reason is that the upstart financial institutions are working on capturing a slice of the lucrative business lending market here. That means they’re more inclined to offer financing options and increased flexibility to the SMB market. And the second is that the fact that they have much lower overhead to deal with and tend to offer more favourable credit terms to businesses.
By contrast, Australia’s big four banks have remained busy dealing with the fallout of their admitted wrongdoing concerning SMB lending. For that reason, they’re more difficult than ever for SMBs to deal with and still show plenty of reluctance to offer competitive financing offers. While there’s some chance that they’ll change their tune to face the rising threat of the neobanks, right now they’re simply too big and operationally cumbersome to change course.
The pros of Neobanks
Besides gaining easier access to financing, neobanks tend to offer plenty of other features that attract SMB business. They include:
- Single-dashboard financial management – they offer SMBs a real-time way to manage cash inflows and outflows that are built to work with the kinds of accounting tools that SMBs rely on.
- Low or no account fees – because they have little overhead, most neobanks don’t charge account fees and that can impact SMB bottom lines.
- Low or no domestic transaction fees – much like the account maintenance fees, neobanks tend not to charge for domestic transactions, which makes them a great tool for SMBs that engage in high-volume transactions as a part of their lines of business.
Depending on the specific neobank, there may be many other positive benefits for SMBs, but by far the biggest one has to do with speed. Because they’re all-digital, SMBs get things like lending decisions, account changes, and even customer service much faster than with traditional banks. And since time is quite literally money for the average Australian small business owner, that’s no small thing.
The cons of Neobanks
Of course, not every aspect of neobanks is positive for SMBs. So, business owners must weigh their options before committing to using one or more neobanking options. Some of the common drawbacks include:
- Short track records – because neobanks are new to the Australian market, they don’t have much of a history from which to judge their operational stability.
- Lack of protection against loss – Not every neobank is covered under the Australian Government guarantee on deposits, which means SMBs can lose deposited funds in the event of a failure.
- Possibility of technical difficulty – While it’s efficient to run an all-digital bank, customers can run into trouble accessing accounts in the event of an internet outage or other technical failure on the part of the neobank.
Realistically speaking, the possibility of access problems isn’t much higher than when dealing with a traditional bank (because they rely on digital systems, too). But the lack of account protection and the possibility that a recent startup neobank might not stand the test of time are certainly things that should concern SMB owners and operators.
The bottom line
Although neobanks won’t be an all-in-one solution for Australian SMBs navigating the current economic conditions, they’re a valuable financial resource to be aware of. And it appears Australian SMBs are paying attention. There’s already evidence of movement toward fintech lenders like neobanks in the small business lending market. And there’s a good chance that SMBs are using them for everyday financial services, too.
So, as 2021 begins, and SMBs begin making financial decisions to lead them back to prosperity, they should take time to explore and understand their neobanking options. They just might find willing partners in innovation in this rising fintech market. And even if they don’t, a little due diligence couldn’t hurt, anyway.
