In judo, you lift and throw opponents on their backs, pin them to the ground and apply various chokeholds or joint locks until they submit. It’s what SMEs might like to do to big banks. But Judo Bank’s co-founder Joseph Healy, has a better idea…
Judo is all about using speed and agility to out-manoeuvre opponents bigger than you. What better name, then, for a challenger intent on running circles around what it sees as the lumbering giants of SME banking in Australia?
As the country emerges from the COVID-19 pandemic, facing a predicted 10 per cent contraction in GDP as 30 years of growth ends in what’s been described as ‘a shattering, warp-speed recession’, two-year-old Judo Bank (formerly Judo Capital) has flexed its junior muscles and honed its ‘high-touch, high tech’ technique to deliver real change.
This summer, it will move into profitability – a major achievement for any neobank, let alone in such short order. Over the last 18 months, it has hired close to 200 staff and is expanding into offices in Sydney, Melbourne, Brisbane, and Perth during the next few weeks. Meanwhile, its stature in Australia’s SME financial services market grows. In April, the government announced an additional $500million (roughly £268million) of funding exclusively for Judo Bank to help smaller businesses through the COVID-19 pandemic.
“The key is that they make a realistic assessment of conditions and take a six-month view; assume that, in many businesses there’ll be no revenue for the next six months, but plan to make sure that the business survives and comes back not substantially weaker,” says Judo Bank co-founder Joseph Healy. That said, he’s optimistic that the recovery will be U-shaped: Australia has been lucky in that respect before. “Although the one thing that I keep reminding our bankers is that we are fundamentally in the business of managing risk. The thing is to make sure that, when loans do go wrong, you’re not surprised by the emergence of some credit losses.”
In the past 12 months Judo Bank’s combination of data-led intelligence and human judgement has largely avoided those, although COVID-19 may be the acid test.
“We’re confident that we are well set up to manage through this,” says Healy. “I’m sure there’ll be a few more customers that’ll get in to difficulty, and a few that we’ll lose money on, but, in the overall scheme of things, it’s well within our expectations.
“Our loan book is relatively fresh. We’re not like a major bank that may have had loans sitting on its books for five, 10, 15 years. The vast majority of the lending we’ve done has been in the last 12 months, so the credit analysis isn’t dated. And we’ve stayed very close to our customers. As soon as we started seeing the onslaught of this crisis, we had our bankers on the telephone, then on webinar, speaking to customers, making sure that they were across the risks in the business, reassuring them of our support, that they shouldn’t panic. That constant contact with the customer has been a big part of Judo Bank’s success so far.”
It shares the same agility and attitude towards the crisis as many small business owners and Healy believes that they will be looking to a bank that ‘applies judgement, not just strict formula and rigid policy’ as they transform their businesses after 2020. By combining human experience and relationship building with data and artificial intelligence (AI) in a Cloud-based business that can then execute the necessary business processes very quickly, Judo aims to deliver on that expectation.
“There is no question that the major banks have taken small to medium-sized businesses for granted over a number of years,” says Healy, who like most of Judo’s executives, worked at a senior level for National Australia Bank. “Banking has fundamentally changed. The banks lost sight of what they were there for – to serve the economy and particularly the SME economy.”
As much as Judo is a digital bank, it’s not defined by its technology; rather, Healy insists, it’s enabled by harmonising it with its people and processes. With a fully integrated lending platform and customer origination delivered by nCino, Temenos providing its core banking system, and an AI/business intelligence-enabled data vault infrastructure, all supported by its Cloud partners Amazon and Microsoft, Judo is using data to build an intimate picture of the businesses and industries it lends to. That enables it to understand and respond to the sector in a way that, Healy argues, traditional banks can’t.
“In the banking industry, people have not built a respect for data,” he says. “We see the future of this company as being significantly defined by our ability to look at data as a strategic asset, data not just on the businesses we lend money to, but on the businesses that we decide not to lend money to, or businesses that we’ve lent money to that get into difficulty. Our data on that customer is complete and is of a high quality.”
It’s also dynamic: data gathering isn’t a once-and-you’re-done exercise, says Healy, and the success of his organisation will depend on keeping it fresh.
“To engender that same feel, passion, and motivation within our people, to see data as critical to our future, is the single biggest issue we’ve got,” he says, “given the legacy of the industry, in terms of its very poor regard for data and very clumsy technology that’s built over many decades.”
With more than 2.2 million small businesses and 51,000 medium-sized businesses in Australia in 2019, accounting for 35 per cent of Australia’s GDP, it’s hard to believe that this is a market that is poorly catered for by the traditional banks. But Judo, which leveraged the biggest Australian fund raise of 2018, to operate as an alternative lending institution while it was awaiting its full banking licence, identified a gap in the SME lending market of about AU$90billion (about £48billion).
“SMEs were basically being offered a one-size-takes-all proposition from the banks, there was no innovation… it was very automated, so there was no judgement being applied. The first thing we had to do was demonstrate that we could grow our business by lending. The second was to say ‘and we can help fund that lending through business and retail deposits’, which we’ve done; we’re about 90 per cent loan-to-deposit funded now,” says Healy.
This clarity of purpose impressed investors, who returned for a successful third equity raise this spring, taking the total to AU$770million (about £413million), and providing enough capital on current forecasts for two years’ growth.
“When we were raising this last round of capital, investors who came into that round said ‘you guys are doing exactly what you said you would do. The consistency in execution, the consistency in vision, the consistency in the purpose behind the company is undiminished from four years ago,” says Healy. “There’s a lot to be said about consistency of your strategic narrative, and consistency in your pursuit and execution of a vision that you have clearly mapped out in all its dimensions. When people see you doing that, they get an enormous amount of confidence.”
Those investors will hopefully feel their confidence was well-placed when Judo moves into profitability this month (June).
“Having been planning this for four years, turning profitable is quite a milestone,” says Healy. “We said that we would get to profitability when our lending book reached about AU$1.6billion and 90 per cent of lending funded by retail deposits, and that’s pretty much where we are today.”
Healy’s ambition is not for Judo to become the biggest SME bank in the country; but it is for it to become the best. As much as he is attuned to the opportunity in servicing the sector, he is also aware of the operational risks involved in going too far and too fast. Scaling as quickly as it has this year could make it hard to replicate the passion and drive employees had for being part of a startup.
“So, we’ve insisted that, as people join the company, they have an equity stake in it, so they think like owners, not just employees. Our people and culture vision is very simple: to be the most trusted employer in Australian banking, full of employees who are raving fans, working in the best job they’ve ever had. It means there’s an element of a mission and purpose around this bank,” says Healy – something he thinks legacy institutions find hard to replicate.
“I’ve been involved in several efforts to launch in-house venture capital businesses to develop new things but, at the end of the day, the complexity and the competition for capital, and the relatively short career span of many executives, means that the patience, enthusiasm and entrepreneurialism – which does not exist inside large banks but are needed to make these things successful – represent serious barriers to success for them,” he says. “Therefore, trying to buy a startup is an obvious alternative to creating it yourself.
“The problem for the company they might be seeking to buy is that history says if you’re consumed by a large organisation, you’re given all sorts of promises and commitment about being left alone, but they rarely last more than one year.
“People change, the person that you got on with, who you trusted inside the large bank, either leaves or is promoted somewhere else, then you’ve got a new person who doesn’t share the same enthusiasm or vision.
“You start getting hit with lots of costs that don’t belong to your business, and bureaucracy. Eventually, they end up really damaging or even killing the business they bought. There’s not a lot of evidence, anywhere in the world, of where big banks have adopted innovative technology developed by others and made it as successful as it otherwise could’ve been.
“So, given how passionate I and my colleagues are about Judo, and our strong belief that we can build a world-class SME bank, I would personally consider it as close to a nightmare as you can ever imagine if we ended up being acquired by a large bank.
“The other part of me, of course, says ‘well, you could make a lot of money from it’, but, frankly, I think building something that stands the test of time and is part of changing an industry, is a much bigger prize.”
The Australian government looks to be pinning its hopes on a business-led recovery to minimise the effects of a looming recession, which was triggered by a lockdown that meant one in five Australians lost their jobs or had their wages cut between March and April. Two-thirds of Australian businesses have reported taking a hit to revenue due to COVID-19. Healy believes it is time for many of them to change their business models completely.
“To paraphrase President Obama, let’s not waste a crisis,” says Healy. “I think we will see transformational change, or at least the beginning of transformational change, in many business models and particularly small businesses, because small businesses can change faster than larger businesses. They’re more agile, more adaptable.
“I’m an optimist, I think the entrepreneurial spirit that makes great SMEs has been ignited by this crisis and we’ll see the tangible product of that in the years to come.”
And Judo Bank will no doubt have become a black belt in SME financial services by then.