Carving a niche: The rise of non-bank lenders

Reports show that non-bank lenders are on the rise, with the 12 months to March 2024 seeing a 30 per cent uptick in loans.

There are a variety of reasons why this is happening. According to Phillip Horder, Mortgage Choice director of panel partner solutions, the higher risk appetite is a major advantage the non-banks hold.

“If we kind of like play the history channel for a little bit, if you look at where non-bank lenders, the space that they played in was always in the riskier fringes of lending … ADIs generally have a lower risk appetite,” said Horder.

“And as the market changes over time and the economy changes, that kind of ebbs and flows. So, at times when that risk appetite starts to contract, what you’d find is the non-banks kind of fill that space, because customers still have needs that they want to have met. Whether that’s a self-employed borrower who doesn’t have all their financials up to date, or someone who’s maybe got some tax debt outstanding, or has had a small sort of default or something like that, they’ll meet that need.”

Horder said that we’re currently experiencing that type of environment now and non-banks have a real opportunity to seize market share through riskier loans: “We’re probably in a bit of a tighter environment right now, which is opening up opportunity for non-bank lenders to go, I can meet that need.”

Further to risk appetite, non-banks often cater to a specific niche in the market that helps them stand out amid larger banks.

“What I’ve definitely noticed over the last few years is there’s a lot of non-bank providers coming in going, you know what, I just want to serve and meet a specific need. So, whether that’s a specific customer problem that they really want to focus on in the mortgages space, or we’re seeing a lot more in business lending now and asset finance as well, they’re all there because they can meet a need at the end of the day,” said Horder.

“And where banks are curtailed from doing that, or where solving that need does not fit into their systems, their ecosystem, the infrastructure that they’ve got, where the ROI doesn’t stack up for them, it can often do so for these smaller, more nimble lenders.”

This has allowed non-banks to carve their own path and stand out from the crowd, which Horder said has resulted in non-banks “beating the banks at their own game.”

Further to more diverse opportunities for consumers, Horder said that non-banks also do well to cater to brokers.

“To a large degree, when we’re talking about brokers, it needs to make life easy for the broker as well. So, delivering a superior broker experience throughout the process, that’s equally as important,” he said.

“I’m seeing some very encouraging signs of some of these non-bank lenders in terms of the broker experience that they have. They’re just able to pivot, to adapt, to change as needs change over time and also as new technology presents itself. There’s absolutely no doubt whatsoever that every bank would still love to create the perfect end-to-end experience for a broker, but that does take them more time. They do have legacy systems, processes. They’ve got those inertia challenges. The decision making is often made several layers away from the coalface.

“So, they’ve got a heavier cost base that they’ll need to manage. And sometimes, what might be a relatively minor win for the lender, but a big win for the broker or the customer, might not translate into reality because of that cost structure. The governance processes as well that the banks have. There are just more layers. There are more protocols. There’s more bureaucracy to a degree.”

Non-banks, while not always small businesses, are able to avoid some of the red tape that ADIs are regulated by, said Horder.

“They’re regulated by ASIC, first and foremost, and ASIC is charged with delivering on certain outcomes. But the key point of difference is APRA, which regulates the banks like its primary function is to protect the financial system and to protect depositors,” he said.

“So they’re always going to be a little bit more risk-averse, relative to just having to be beholden to ASIC. There’s still significant hurdles and you’ve got to make sure that you are doing the right thing by the customer, that you’re not putting them in financial impairment. But it’s certainly a little bit easier when you’ve got one less regulator to worry about.”

Non-banks also have the advantage of reduced operating costs. While some non-bank lenders have branches, most don’t. This means staffing operating costs are reduced, helping minimise overheads.

“Generally, these non-banks are leaner, not as cost-heavy organisations. So, they can operate on a smaller margin. They can be competitive in that space. The cost of money is always going to be a factor in terms of your ability to deliver,” said Horder.

[Related: Client circumstances drive brokers to non-banks at record levels: Broker Pulse]

Jack Campbell is the editor of Broker Daily. After graduating from the University of Wollongong in 2022, Jack began his journalistic career working on Broker Daily’s sister brand, HR Leader. In August 2023 he was made the news editor and worked alongside some talented journalists writing articles and recording podcasts.

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