The Lagging Development of Small Business Internet Banking in Australia (*). (Global Perspective)

By Wright, April; Ralston, Deborah | Journal of Small Business Management, January 2002 | Go to article overview

The Lagging Development of Small Business Internet Banking in Australia (*). (Global Perspective)


Wright, April, Ralston, Deborah, Journal of Small Business Management


The most recent technological advance with the potential to revolutionize the financial services industry worldwide is Internet banking. Given that on-line banking transactions cost substantially less than physical branch transactions, banks throughout the world are rushing to develop their Internet strategies. This is a boon for home banking consumers, who can now enjoy more convenient and timely access to funds at lower cost (Harper 1997). Furthermore, on-line mortgage brokers, such as e-loan and mortgage.com, are reshaping credit markets in the U.S., Europe and Asia. While Australian financial institutions have been slower to join the Internet banking trend, almost all banks and other financial establishments now offer on-line banking facilities or are planning to do so in the near future. However, Australian financial institutions are primarily targeting their Internet banking strategies on the personal home banking segment. The small business segment has been largely ignored.

Although Internet banking accounted for only 1 percent of financial transactions in Australia in 1998 (Australian Bureau of Statistics 2000), regular users of on-line home banking tripled in 1999 and continue to increase. Yet, many small business customers of the major banks are unaware of the Internet banking facilities being offered to access accounts and transfer funds. Many conduct business with small financial institutions such as credit unions, which do not provide Internet banking. On the lending side, although personal banking customers of some banks, such as the Commonwealth Bank, can now apply for home loans over the Internet, this facility is not available for small business loans, which are more difficult to evaluate. This contrasts with the United States, where small business owners can visit multiple sites on the Internet, find the most attractive terms, apply on-line, and receive an answer from the site sponsor, often within 30 minutes (Australian Banking and Finance 2000).

The failure of Australian financial institutions to market Internet banking products and services for the specific needs of the small business segment is surprising. Since the mid-1990s, small business lending has replaced large corporate lending as a source of revenue for Australian banks. Large corporations increasingly bypass financial institutions and meet their funding needs by issuing commercial paper on their own (Reserve Bank of Australia Bulletin 1997). Small business lending has also helped to offset the declining margins in the housing loan market caused by competition from mortgage originators. To attract small business borrowers, banks offered discounts from standard small business indicator rates, waived establishment fees, and reimbursed refinancing costs, in addition to developing new products specifically for small business. One Australian bank, Suncorp-Metway, has recently launched a telephone call center dedicated to servicing small business customers. The center offers fast approval of low -cost term loans, overdrafts, business checks, and cash management accounts. While the Internet offers even greater potential benefits to small business borrowers, Australian financial institutions have not yet capitalized on this delivery channel to gain greater shares of the small business market segment.

From both a lending and a transactions perspective, the most significant benefit of Internet banking is cost. By facilitating the entry of new players that are unhampered by high-cost branch infrastructures, including several virtual banks in the United States, Internet banking helps to lower interest margins for both new and existing lenders. The increased availability of lower cost loans is a bonus for small businesses, since it has long been recognized in the literature that small firms are dependent on banks for debt funding (Peek and Rosengren 1998). In addition, information asymmetries make it difficult for banks to assess the relative worth and risk of small business lending and hence small firms may face restricted access to funds and/or higher costs of funds (Ennew and Binks 1995). …

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