The famous 17th-century French artist Molière was once imprisoned for his debts as a young man.
The sharp-witted playwright quipped: “Debts are nowadays like children: begot with pleasure but brought forth in pain.”
Perhaps things would have been different if peer-to-peer (P2P) lenders were an established part of the scene to lessen the pain (if not heighten the pleasure).
“Banking – like so many other industries – is on the cusp of a technological revolution,” says Matt Symons, the chief executive and founder of Australia’s first P2P lender, SocietyOne.
“DIY platform-based alternatives are upending the market by connecting people directly and empowering them with more choice, bypassing the mainstream banks entirely.”
P2P lending – also known as marketplace lending – matches borrowers and investors using sophisticated algorithms via an online platform. The role of the bank is completely removed, as are the traditionally higher costs of running branches and holding capital. Savings are passed on to borrowers in the form of lower interest rates, which still remain high enough to attract yield-starved investors.
SocietyOne was launched in 2012 and has already surpassed $40 million in loans and attracted more than $200 million in applications. That’s still a small sliver of the Australian market and a long way from the surging US industry which reached $US12 billion in 2014 after doubling in size every year since 2010, according to Morgan Stanley estimates (www.morganstanley.com/ideas/p2p-marketplace-lending
However, Symons says things are changing in Australia thanks to the recent introduction of comprehensive credit reporting – a move that allows the risk of unsecured personal loans to be more accurately assessed.
“One of the roadblocks for this emerging industry to take off has been the lack of available credit information, which gives the advantage to the banks. With the introduction of comprehensive credit reporting in 2014, we can now move towards a more level playing field where better credit and underwriting decisions can be made by all credit providers, not just incumbent banks.”
It is not a system without risk. P2P lending is currently focused on the unsecured personal loan sector which has naturally high default rates. There have been failures such as UK-based Quakle, which closed in 2011 after lending money based on social media rankings rather than traditional credit ratings.
P2P lenders today use far more sophisticated credit models and risk management technologies. SocietyOne relies on its own proprietary technology platform, Clearmatch, which sits at the heart of the company.
“Clearmatch’s credit module can perform a series of automated functions by loan product, including scorecard attribution, serviceability calculations and decision tree modelling through complex test sequencing. It can evaluate data systematically to determine the appropriate application outcomes,” Symons says.
“But while we employ advanced credit decisioning techniques and automation to process and rank applications according to risk grade, we still rely on seasoned credit and risk analysts to physically review, analyse and assess the required credit inputs, including transactional bank data and other information.”
Typical gross returns on unsecured personal loans are 11-12 per cent before defaults, with the overall default rates across the platforms typically 2-4 per cent, according to the company’s website. Loans are pooled creating an investment similar to traditional fixed income products which deliver regular cash flows (although a secondary market for these type of loans doesn’t yet exist in Australia).
“We have significant participation on our platform from institutional investors, as well as many individual investors who meet the definition of a wholesale client.”
The big banks are keeping a close eye on the sector. SocietyOne is majority-owned by Westpac-backed tech fund, Reinventure while the world’s largest P2P lender, San Francisco-based Lending Club, has partnered with a wide range of financial institutions such as mutuals and credit unions.
Lending Club raised $US1 billion in December for its public listing and, in July, SocietyOne appointed the company’s former vice president of marketing, Mitchel Harad.
“When entrepreneurs like our new chief marketing officer Mitchel Harad make the decision to move from San Francisco – the heart of innovation and the global P2P lending movement – to Sydney, it’s a testament to the increasing popularity of Australia as an attractive destination for world-class talent,” says Symons.
SocietyOne is a non-resident member of Sydney-based fintech hub Stone & Chalk, which opened in August 2015.
This article represents the views and opinions of the author and do not necessarily reflect the opinions of BPAY.
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