A new potential boom is simmering below the surface, awaiting the repercussions of the Murray inquiry recommendations to break out.
Gradually a set of circumstances is coming together that will see a big rise in direct lending to individuals and businesses that bypasses banks.
The most common form of this non-bank lending is peer-to-peer lending, which targets the high interest rate personal and business loan market. But the boom will go much wider than this market. When Murray makes his recommendations, they will almost certainly include that the banks must have more capital backing to their loans, which will lower their return on equity.
They will try maintaining their returns by once again taking the stick to bank depositors and that will further spur this secondary market. The difference between what a bank term depositor receives and the lending rate paid by borrowers, particularly personal loan and business customers is becoming a larger and larger percentage of the transactions. At the same time the ability of everyone to obtain their credit rating scores helps good borrowers understand that they are being ‘ripped off’ when they are charged interest rates that often balloon well above 10 per cent. At the same time, bankers now have few people with the knowledge of how to ‘kick the tyres’, which multiplies the gap.
Back the 1960s and 1970s, banks were restricted on how much they could lend and a substantial secondary market developed, including bank finance companies that operated outside bank regulations.
Most of that secondary market infrastructure has now gone but some of it will come back in different forms. Peer-to-peer lending is booming overseas. The largest operator in Australia is SocietyOne, in which Westpac (via Reinventure Group, the Westpac-funded venture capital manager) took a shareholding earlier this year so as to have a stake in a disruptive rival.
It is likely that SocietyOne will acquire more prominent shareholders so it can propel its lending and depositor book. SocietyOne says that overseas, P2P providers usually match individual investors directly with potential borrowers that meet the eligibility requirements. However SocietyOne provides a portfolio of loans funded by depositors who receive much higher returns than bank deposits, although they do not have the government guarantee that applies to bank deposits under $250,000.
At this stage only wholesale investors can make deposits with SocietyOne but this will later be extended to retail investors. Meanwhile the lift in the costs to banks will encourage new players to enter the non-bank lending and deposit fields.
And those new players will cover a wider field than the high rate personal or business loans targeted by SocietyOne. For example, reputable solicitors have mortgage books and there will be an expansion of this service as depositors become desperate for real returns to live on. The movement will also go ‘underground’. Parents and grandparents are getting token rates from bank deposits and watch their children or grandchildren pay much higher interest rates for their bank loans. The children can restore their parents or grandparents income and save some money on the way. Sometimes these family deals are linked to childcare.
Everyone wins unless there is a substantial recession that would escalate defaults as a result of unemployment. Where families are involved this is a big risk because the parents or grandparents cannot easily foreclose.
These developments are just one a few of the many ‘disruptions’ that will change the banking scene over the next five years. They are driven by the banks high profits and the new technologies.
But it will all take time and banks’ profits and dividends look safe for a few years.