Why are we doing this?
Historically, small businesses have relied on tangible assets, such as housing and capital stock, as collateral against a loan. However today, increasing numbers of firms are relying more heavily on intangible assets to run their business, such as technology and/or human capital.
This trend changes the dynamic of financing small businesses and requires complementary approaches to existing best practice in the lending sector. As an example, Labor has supported crowdsourcing opportunities and easing access to venture capital.
This is particularly relevant in the post-GFC environment for global finance. The OECD has found “the crisis had a negative effect on bank lending”, and “When bank lending is reduced, SMEs tend to be more vulnerable and affected than larger corporations and credit sources tend to dry up more rapidly for small firms than for large companies during economic downturns” (OECD, “SMEs and the Credit Crunch”, 2013).
In this environment, information is central. Information enables lenders to better assess risk and underpin a robust financial environment. So while not all new small businesses want to grow, many do and finance is the single most important factor in enabling that. A competitive financial lending sector helps create opportunities for small business growth.
These issues were canvassed by David Murray’s Financial Services Inquiry (FSI). The FSI explored how sharing positive credit information of consumers and bank customers helps to reduce loan default rates, increase the availability of credit and “would likely improve credit conditions for borrowers, including SMEs”. This is called ‘Comprehensive Credit Reporting’. Most other OECD countries are head and shoulders above Australia when it comes to a credit reporting framework where positive information is shared amongst the lending sector.
Sharing positive information about consumer’s credit history, instead of locking up records within each bank, results in a better deal for everyone. This is because, as the FSI noted, “personal credit history is a major factor in credit providers’ decisions to lend to consumers, but also to new business ventures and smaller firms”. Unfortunately in Australia, positive credit information is not widely shared. At the moment, reporting positive credit information is subject to a relatively new voluntary industry code.
Several economic studies have shown a benign economic benefit of comprehensive credit reporting. A MasterCard/ACIL Tasman report modelled these changes and found a one-off increase in capital productivity of 0.1 per cent, translating in economic benefits of up to $5.3 billion in net present terms over the following decade. International studies of comprehensive credit reporting in Hong Kong, Japan and Latin American countries showed a decline in default rates due to better credit assessment.
How Labor will help small businesses to better access finance?
Labor knows the best way to create new net jobs is from young businesses turning into strong, growing businesses.
This is why Labor will support a 21st century regulatory framework for access to financial information.
Sharing positive credit information improves access to finance for small business and creates greater competition amongst lenders.
Noting the benefits to consumers and small businesses, particularly new business ventures, Labor will determine if the current status quo isn’t up to scratch, mandatory Comprehensive Credit Reporting will be legislated.
David Murray noted the recent voluntary industry code recently established to introduce more positive information sharing in the financial sector. The FSI explicitly recommended a government inquiry to determine the effectiveness of the industry code and, if the code was found to be inadequate, a mandatory framework for comprehensive credit reporting. This would likely require Federal legislation compelling the financial sector to share particular credit details amongst each other.
The Turnbull Government’s recent announcement on data sharing was entitled, ‘Supporting Australia’s FinTech Future’. But the question we should be asking is: how can we get more benefits for consumers and small businesses?
We have yet to see this reflected so far in the public debate. This is disappointing as small businesses are the big winners from positive reporting. The recent announcement of a Productivity Commission inquiry does not focus on small businesses or even ask how positive credit reporting can help foster for small business activity. We need to look beyond a strict focus on financial technology and work out how to best help all small businesses in Australia.
Innovation occurs each and every day in millions of small businesses across Australia. Leaving them out of this conversation will create a massive opportunity cost.
This is particularly important as since David Murray’s review, a number of small banks and financial technology businesses have raised serious concerns about the adequacy of industry participation from the larger banks. Daniel Foggo, CEO of RateSetter, says Labor’s plan will create a more competitive market and accelerate our economy.
Comprehensive Credit Reporting facilitates more competition, more transparency and a greater environment for new lending in the economy. This is good for consumers and good for small businesses.