Judo Capital set to become a bank this week

Judo Capital, an SME lender that officially launched in March 2018, is expecting to become an authorised deposit-taking institution (ADI) later this week, its co-CEO Joseph Healy has revealed.

Mr Healy revealed the news at the AltFi Australia Summit 2019 in Sydney on Monday (15 April), where he told Mortgage Business that the decision was the result of plans born three and a half years ago, when the SME lender was first being developed.

He said: “From day one, when we decided to build Judo, we built it with the intention of eventually becoming a bank. We believe that – notwithstanding the higher regulatory cost associated with being a bank – there a lot of other benefits that allow you to grow and offer businesses a greater range of options than we would be able to offer if we were a non-bank lender.”

Mr Healy added that one of the biggest benefits of becoming Judo Bank was that it could offer and access retail deposits, reducing its reliance on wholesale funding.

“You can have a mix of different types of borrowing in order to lend,” he told Mortgage Business, “and the deposit market in Australia is a huge market, and we see it as an attractive way in which to fund our business, together with wholesale funding lines.”

“The deposits will just give us the ability to be able to scale the business faster than would otherwise be the case,” he added.

Mr Healy said that the ADI licence is expected to be granted later this week, which will enable Judo to change its name to Judo Bank and offer deposits to consumers as well as small businesses.

He emphasised, however, that the bank will “only lend to small and medium-sized businesses”, as is the case now.

Banks have ‘lost the skills and craft of traditional banking’

While speaking during the panel session The Hayne RC, now it's over what does it means for SMEs and consumers?, Mr Healy said that Judo Bank aims to bridge the divide between a digital lender and an old-fashioned banker. 

He elaborated that small businesses had felt that the mainstream banking institutions had “moved away from the customer” and that this “industrialisation and dehumanisation” of the service proposition had impacted small business’ ability to borrow money.

Mr Healy said that he believed SMEs felt that the banks had not really catered to their needs and were offering a “one size fits all, take it or leave it proposition” that is “largely predicated on the availability of real estate security”.

According to the Judo co-CEO, while there are “four Cs” of credit (character, capacity, capital and conditions/collateral), the incumbent banks have defaulted to the fourth C and “lost the skills and the craft of traditional banking [based on the four Cs]”.

He elaborated: “What the industry has done in Australia, and this is true also of the UK, is that it has defaulted to the fourth C. It essentially says to an SME: ‘How much is your home worth?’ Or ‘How much real estate security can you offer?’ [Their] lending policy says you can do 60 or 70 or 75 per cent and that means that a lot of small businesses do not get access to the credit that they deserve.”

Mr Healy said that the proportion of business lending, as a percentage of gross domestic product, had dropped below pre-GFC levels “because the banks have industrialised the service proposition, they’ve fallen in love with mortgage lending to the household sector, they’ve lost the skills to do proper SME banking, so any SME banking that is actually done is predicated on security”.

‘Trust arrives on a tortoise and leaves on the back of a galloping horse’

Noting that many banks were now working to re-establish trust following the royal commission, Mr Healy concluded: “We all know that trust arrives on a tortoise and leaves on the back of a galloping horse. It’s not something you can flip a switch and demand that it is reinstated. In fact, it’s somewhat arrogant to say that ‘We’re going to rebuild trust’ because trust comes from the community, not from the banks. So the banks have a lot of hard work to do over many, many, many years to establish a semblance of trust.”

However, the former major bank executive said that one of the ways that trust can be re-established in the industry is through “greater choice of competition”.

“I’m now outside the mainstream or major [bank] industry, launching a challenger bank that is going to take on major banks, focusing only on small to medium-sized business with a mixture of cutting-edge technology but not a fintech.

“This is a relationship-centric proposition that has a human face in dealing with the customer, an ability to apply judgement to the way lending decisions are made, and going back to some of the traditional values of SME lending, built on cutting-edge technology.

“We will be enabled by technology, not defined by technology,” he said.

[Related: Bill to establish $2bn finance fund enters Parliament]