a phone showing the growing changes to the banking system through fintech

Fintech and Australia’s Commercial Mortgage Lending Industry?

While banks have always faced unprecedented challenges, the last decade has proved particularly challenging. Shrinking revenues and extreme demands not just from customers, but the regulators as well, have put their resilience to the test.

However, the environment is about to get tougher with the emergence of a powerful force: financial technology or fintech.

A commercial business open for trading in the Perth CBD.

Fintech and Commercial Mortgage Loans

Restaurants, shops, and other types of commercial properties are typically bought using commercial mortgage loans. When compared to residential loans, commercial mortgages have a shorter lending period and higher interest rates, although it would differ from one company to the next. They also have a smaller size of the loan than the appraised value of the property, a term known as the loan-to-value ratio.

Commercial mortgage loans have strict lending terms, and the amounts are higher than residential mortgages. It is why banks would often review the upcoming businesses and would monitor them frequently.

However, the advent of fintech did not make the banks happy.

The organisations, particularly the Australian Prudential Regulation Authority (APRA) started to implement rules and regulations that have made it more difficult for businesses to begin their venture. The only exception is when the borrower or the business already has an extensive financial history. Unfortunately, many businesses have little to no history.

To justify the tightened rules, APRA has mentioned in a statement that problem borrowers result in the banks’ credit loss in Australia. These borrowers are those with improper underwriting and unsupervised use of credit, especially in the commercial real estate loans.

As of today, there remain three borrowing options for businesses:

  1. Traditional: Businesses will take out a loan through APRA or a bank with a promise of lower interest rates and risk.
  2. Non-Bank: Lenders are under the regulations of the Australian Securities and Investments Commission (ASIC). They offer lending services and usually nothing more, but they do have fewer rules. Therefore, it is often easy to acquire a loan from these entities.
  3. Person-to-Person: P2Ps involve investors and high net worth companies or individuals. They have the least number of rules, but they do come with the biggest risk.

Then, there’s financial technology. Fintech in Australia lets businesses skip the traditional method. Instead of going to banks, it matches the borrowers to the best-suited loans from either non-bank or P2P lenders. As a result, even those with a higher risk profile can get a loan despite having rejected by banks before.

But What Exactly is Fintech?

It may appear vague to those who have just encountered the term, but before it became a word that is on everyone’s lips today, it started as a spelling error. Fintech is an umbrella term that embraces different innovative technological ways. Its goal is to create, deliver, and alter financial services, not just in Australia but the rest of the world.

Originally, it was referred to as computer technology, which was applied to the bank’s back-office operations. Things have changed in the 21st century. Fintech has become a concept with a broader reach, deeper scope, and disruptive nature.

Let’s be clear; Fintech is not out to destroy banks and other traditional financial firms. Banks will be here to stay. However, fintech is indeed revolutionising financial landscape in Australia & around the globe. Currently, it is forcing banks to review their obsolete paradigms. This helps encourage solutions that are consumer-centric with low cost and effective loan options.

Fintech Applications

Fintech players have posed many challenges to mainstream financial institutions. There are numerous services offered, including asset management, online banking, and peer-to-peer lending. As a result, banks are recognising the potential of fintech, which appears to be not just for a few months or years but for the long term.

Quantum Finance believes fintech will evolve and greatly benefit the consumer. Fintech is quite versatile as it can be applied to any innovation that enhances and optimises how businesses are conducted, particularly in financial transactions. Many solutions are based on technologies, including artificial intelligence (AI). They enable financial service firms to gather pertinent customer data while deducing patterns of usage. In some cases; it is even possible to replace human intervention with the use of automated algorithms.

With such convergence as efficient as finance and technology, it has incubated different useful services and products that can redefine the way people currently manage their finances. Plus, financial services can come with better and more consumer-centric guidelines, making them more accessible to businesses, whether small or big.

A fountain with a pink light on display in the middle of Perth.

The Fintech Ways of Disrupting the Mainstream Financial Ecosystem

Fintech has a belief system that has ushered in a fresh new era of efficiency, inclusivity, and clarity in the world of financial services. It has helped reshape the expectations of the customers, enabling them to set a much higher standard when it comes to user satisfaction and experience.

Fintech is based off several different concepts:

  • Security: When borrowing commercial loans, customers demand security. They should feel protected from threats, including data and identity thefts and fraud.
  • Mobile Payments: Using mobile devices is one thing that consumers look forward to with fintech. Businesspeople have hectic schedules, and therefore they want to know how they can check their loans, pay their employees, and perform other activities.
  • Personal Financial Management: PFM allows consumers to see their financial life in one place without the need to pull data from one agency to the next. All the information they require should be easy to obtain.
  • IoT-Based Pricing: This concept is useful for various areas, including when obtaining insurance. The rates would then be based partly on the behaviour and background of the borrower by monitoring their efficiency, such as in driving for auto insurance.
  • Peer-to-Peer Lending: Business borrowing from a person or a group of investors is much easier; thanks to fintech that matches borrowers with the right lenders.
  • Alternative Scoring for Business Credit: Commercial mortgage lending decisions and rates will be based partly on activities and other alternative scoring mechanisms, not just the credit history.

For many commercial or business borrowers, one of the biggest obstacles when it comes to borrowing money is trust. There is also the perceived complexity of the entire process. The businesspeople would then try to avert risky situations by simply going to the bank.

Compared to mainstream lenders, fintech firms are newer and have fewer customers. The number of people that trusts them continues to grow, but there is still a majority that prefers banks. They want an established company instead of one that they just heard about. However, the problem is that the banks would not approve their loan application. In return, their business launch would have to get pushed away and deferred while they wait to gain approval.

The reality is that banks are not easy to sway. They follow a protocol that prevents them from allowing neophyte businesses, especially those with lacking history, to obtain a mortgage loan. Consumers, including entrepreneurs, find it overwhelming to go to another financial institution to borrow. Therefore, they stick with their current firm, waiting for them to receive value-added services.

Unfortunately, it may not happen at all. It is why fintech aims to change the way consumers perceive non-bank and peer-to-peer lending options. Borrowers have these three expectations:

  • Trust
  • Value
  • Convenience

Financial industry leaders will not easily adopt new strategies, technologies, and processes. It is why consumers are learning that they have other options. Instead of going to their current banks, they want a more competitive offer with easier processing of the loans. Busy individuals have no time to apply and reapply several times to get the money they need to start their business. Banks are running the risk of their consumers going for P2P and non-bank lenders.

From the fintech perspective, the customers are sending a clear message. It is time for consumers to gain easy access to financial services while eliminating as many challenges and hindrances as possible.

Lenders and borrowers come together, enjoying the benefits of business loans that can help in growth and development. The methodology used in pricing is largely based on the risk profile of the individual. At the same time, the Australian lending model, especially for small businesses, is increasing in transparency.

Fintech will inevitably change the borrowing methods for commercial mortgage loans in Australia. Financial technology will continue to create opportunities for new business players, as well as the industry incumbents. The emerging-market has always had a dynamic nature, which generates numerous challenges even for the developed world. However, it also opens up growth and innovation opportunities.

In the years to come, companies and individuals are set to see changes in the financial landscape. Fintech applications, products, and services truly broaden the financial and digital ecosystems. Therefore, finance has become more inclusive while being customer-focused and democratic.

This is exactly the goal of Quantum Finance, a fintech loan facility for commercial mortgages.

Talk to one of our experts today to let us help you get the commercial loan you need ASAP.

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Gavin Harrigan

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With over 18 years in the finance industry, Gavin's wealth of knowledge relating to home loans is matched by few in Australia. This knowledge is reflected in his dozens of awards, including being inducted into the Plan Australia Hall of Fame. His qualifications include a Bachelor of Commerce from Curtin University for Applied Finance and Commercial Law and a Diploma of Finance and Mortgage Broking Management from AAMC Training Group.

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