Peer-to-peer grows up

We check in with Australia's P2P lenders as they chase bigger loan books.

Summary: Australian peer-to-peer lenders have grown in the past 12 months since we last checked in with their lending models. 

Key take-out: There are still differences between the providers and business models continue to change, so check the particular model of a provider before signing up as a lender. 

Key beneficiaries: General investors. Category: Alternative asset classes. 

Australian peer-to-peer (“P2P”) lenders use online platforms to match investors with borrowers, and slice off a portion of the returns for themselves (and in theory, a good return for investors) – and as the graph below shows, the launch frenzy among these P2Ps has peaked across the region. Last year we caught up with the major Australian players in the space and asked their founders about their long term plans for growth – click here to read more. Over the past two weeks we’ve been checking in with these same lenders to review their performance and loan book growth. All have posted increases in the number of loans they are writing – but as an investor, you should know there is still fine-tuning of the business models going on. We’ve outlined the priorities and approaches of each lender below.  


Source: KPMG

While the P2Ps may not have penetrated mainstream consciousness, the lending market is doing spectacularly well. According to a KPMG study published in March, Australia’s alternative finance market grew 320 per cent last year to $US348 million and is the third largest market in the Asia Pacific behind China ($US1.1bn) and Japan ($US360m).


Source: KPMG

Australia still lags its peer and neighbor New Zealand on a per capita basis, although the dominance of the banks in Australia must be taken into account here – because of this, there might not be as much room to improve as there seems at first glance. 

So how have Australian P2P start-ups performed over the past year? Here’s a breakdown of five platforms: 

The chiefs of all of the above lenders are bullish about the future, with the quintet believing this is a market that is only getting started. The sector still faces an evolving regulatory market, and not all platforms are open to retail investors. Here’s what the chief executives had to say:

RateSetter – chief executive Daniel Foggo 

Available to retail investors 

A spinoff of a UK company, RateSetter provides personal loans for a broad mix of purposes, ranging from automotive finance and home improvement to debt consolidation to medical bills. 

The average income of borrowers is $90,000 and the majority are homeowners. The company has also recently won approval to lend to business, although is moving into the sector slowly, with a narrow focus on strong credit lending verticals. RateSetter includes a provision fund as a safety net for loans that don't get paid back – which currently holds nearly two times expected loan defaults – around $2 million. 

“The outlook for peer-to-peer lenders is incredibly strong. We now have a number of operators in Australia, who are effectively leveraging their technology platforms to provide borrowers with better rates and faster turnaround times, whilst providing investors with strong returns,” says Foggo.

“We really believe that we are only at the very start of the journey for our industry, and that over time we will open up asset classes that the banks have had exclusive jurisdiction of for a very long time.”

DirectMoney - executive chairman Stephen Porges

Retail and wholesale investors 

Using a “risk-based” pricing strategy, DirectMoney offers “prime credit quality” unsecured personal loans – with more than 500 borrowers over past – and on-sells these to both retail and institutional investors. The company targets a return to unitholders of the RBA cash rate plus 5- 5.5 per cent over the medium term. It secures customers via a direct marketing channel as well as introductions from mortgage and finance brokers.  

“The Australian P2P/marketplace lending community is quite new and growing quite fast. We expect (loans) will grow at high double digits rates for the foreseeable future as consumer borrowers and investors of all types become more aware of the value offered by companies such as DirectMoney,” says Porges. 

“When we look at past credit performance data for consumer borrowers we’re encouraged that loss rates have increased only to small degree during volatiles periods such as the GFC. The RBA’s financial stability report of April 2016 indicates the percentage of non-performing personal loans peaked at ~2.4% in the period 2003 to 2015. That said, DirectMoney’s credit process will remain responsive to changing economic conditions and make adjustments as needed to meet our credit performance targets.”

SocietyOne - chief executive Matt Symons

Wholesale investors only

Offering unsecured personal loans as well as a secured agri-business product, SocietyOne has transformed from a “tiny” company four years ago to one now employing about 80 staff.

“We have had a very successful start to 2016 and are looking at an equally strong second half...We are also now focusing on establishing our name and brand among consumers as we are still a relatively small player in the sector so you will start to see more of an advertising and marketing push in the months ahead,” says Symons. 

“We continue to attract new investor funders to the platform, especially in the mutuals’ sector and from ‘sophisticated’/wholesale investors. From a shareholder perspective, we also undertook a successful capital raising in May which saw us raise a further $25 million from our existing and new shareholders to fund future growth. That takes the total amount of capital raised in three funding rounds to $55m.”

“From our perspective, we are bullish about the immediate future and the outlook is very bright indeed. With the growth we have experienced, we are now targeting a 2-to-3 per cent share of the broader Australian consumer finance market (as defined by APRA which includes credit cards, personal loans and car loans) which is estimated to be $100 billion in size. We are also looking to grow our customer numbers from around 5,000 now to 100,000. We are looking to achieve those targets over the next four to five years.”

ThinCats - chief executive Sunil Aranha 

Wholesale investors only

ThinCats only makes secured loans to small and medium-sized businesses, and offers, it its words, “growth finance, not stress finance”. The group has attracted a diverse borrower cohort from sellers of solar, manufacturing and selling organic beans and health foods, as well as wholesale distributors of jet fuel. Its lender group has grown from 25 to more than 400 in the past year, with a minimum bid of $1000 for lenders/investors. Its UK parent has more than 5000 lenders.

“The market for small business loans is $73bn a year and 91 per cent of that is held by banks, which only lend against homes. You could argue that banks are putting SME out of business. We come in the gap where customers don’t know there’s anyone out there to help them, between banks and payday lending,” says Aranha. 

“I think there is quite a lot of growth still to come in the marketplace, quite a lot of unserviced market which is fabulous,” he says. “The challenge is creating awareness, in terms of a conservative investor lending market. There’s lots of investment money, super money, looking for places to go, but (compared to US, UK) Australia is a broadly more conservative environment unless it’s in an asset class that is already known.”

Marketlend – chief executive Leo Tyndall

Retail and wholesale investors 

Marketlend provides loans to businesses, offering a working capital facility or line of credit to borrowers, and has 900 registered investors.

“We implemented an insured product as of August 2015 and we have seen a larger participation and improve closure. We has moved away from the smaller business loans to more the debtor finance and supply chain finance credit facilities,” says Tyndall. 

“Origination is always a challenge but we have been able to take on some significant investors in debt and equity including high profile new board member, Jon Barlow and high profile, shareholder Mati Szeszkowski.

“We have been able to really push with implementing a lot of upgrades to the systems, and completed a due diligence by Deloitte in April.

“Any adverse economic conditions will test the peer to peer lenders, and it is really the conservative approach with a lot of risk measures that will last.”

What does this mean for me as an investor?

When Eureka Report checked in last year, some providers had literally only just switched their websites to live and started writing loans. Growth targets were high, and the number of lenders jumping on board has grown across the board in the past year – but the challenge is communicating the varying models to lenders and borrowers in what, as Aranha of ThinCats highlights, a lending market that can be conservative. When looking at the different providers as a prospective lender, consider the following (this info will be available on each provider’s website and PDS documents): 

• Minimum investment amount,

• Size of loan book and whether a provision or insurance fund is available in case a loan defaults, 

• What your own risk-return trade-off is – riskier loans attract higher returns, but also have a higher chance of defaulting, 

• What info you are given about borrowers before you commit funds – most websites will give information on the type of borrowers, default rates and returns on offer.

Eureka Report also contacted Australian P2P lender MoneyPlace for an update on their progress, and were unable to get final comment by deadline. You can view last year's Eureka Interactive video with MoneyPlace – click here. 

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