Retail peer-to-peer investors quadruple since 2016
In April, ASIC released its third report on marketplace lending, the Survey of marketplace lending providers: 2017–18. The report paints a clear picture of a once nascent industry enjoying growth with new borrowing increasing by nearly 45% in the 2017–2018 financial year.
That growth in borrower demand for marketplace lending bucks national personal finance trends. Australian Bureau of Statistics (ABS) figures show declines in personal lending since December 2017 and their March release showed lending to households for personal finance had dropped an astonishing 23.8% since the previous year, with other sources showing that the market share of the Big 4 banks has declined significantly over the last two years.
ASIC’s report on the burgeoning sector draws on a survey of 13 marketplace lenders, covering questions such as how investors and borrowers are matched; how credit risk and interest rates are determined; and the characteristics of the loans funded, including interest rates, amounts, term, security and default. In this article, I examine five of the report’s key findings, sharing our perspective from a marketplace lending platform at the forefront of the sector, RateSetter.
1. More borrowers and investors are choosing marketplace lending
ASIC found that the number of retail investors on 1 July 2018 was 79% higher than the previous year, and had quadrupled since 1 July 2016. While the rate of new investor growth was lower compared with the 2016–17 financial year, the total amount invested had increased by $108 million.
RateSetter alone now has more than 15,000 registered Australian retail investors, showing that peer-to-peer lending is now very much moving into mainstream investment portfolios.
At the same time, demand from borrowers surged, with the total amount of funds borrowed growing from $300 million in the 2016–17 financial year to $433 million in the 2017–18 financial year. There are three main reasons for this growth.
First, the consistent returns offered by fixed-income investments, such as consumer loans, have made them an attractive alternative to more volatile products, such as shares. As investors seek to diversify, consumer loans provide a way to build a core of financial stability into otherwise varied portfolios.
Second, after the revelations of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, consumers have become savvier. Alert to the issues associated with traditional finance providers, they have been more willing to adopt newer business models and brands. By contrast, RateSetter places a premium on transparency, demonstrated by the publication of its loan book every quarter.
Finally, consumers are becoming more aware of the dangers of credit card debt and seeking out cost-effective solutions. APRA found that total personal credit card debt owed to banks declined by 4.8% in the year leading up to March 2019— the second-largest annual decline since 2002. Consumers are seemingly tired of the eventual sting of credit card debt if it is not paid down each month. Consequently, more Australians are turning to the comparatively affordable costs associated with a low rate personal loan.
2. Marketplace lenders are exploring new markets
Marketplace lending business models are evolving, with several platforms entering into new territory since the previous ASIC survey. The survey found that one retail platform established a separate platform for wholesale loans to fund specific types of loans, another platform moved investors to fund whole loans rather than fractions of each loan, whilst three platforms had started offering loans originated by third parties.
The report references RateSetter’s ‘renewable energy marketplace which provides loans for the purchase and installation of clean energy products, such as solar panels and home batteries. These markets allowed us to become the official administrator of the South Australian Home Battery Scheme and to offer consumer loans supported by the Clean Energy Finance Corporation. The SA Home Battery Scheme giving up to 50,000 South Australian households access to $100 million in State Government subsidies and $100 million in low-interest loans made available by the Clean Energy Finance Corporation. The scheme has added to an extensive installer network (491 accredited groups) and manufacturing partnerships (Tesla, LG and Sonnen).
RateSetter is on track to become Australia’s leading renewable energy lender, estimating its green markets have led to CO2 emission reductions of 18,200 tonnes to date.
The expansion of marketplace lenders into new markets is supporting their continued growth, and we expect this trend to continue.
3. Interest rates have remained highly competitive
The ASIC survey found that the average interest rate charged for marketplace loans entered into during the 2017–18 financial year was 11.5%, up from 10.5% in the 2016–17 financial year.
Importantly, the average interest rate hasn’t moved significantly since the first survey was conducted at the end of the 2015–16 financial year. With 71% of loans in the 2017–18 financial year attracting interest rates of 12% or less, this indicates that marketplace loans are generally offered at lower rates than those offered by more traditional institutions.
4. Security remains a top priority for online platforms
Five lending providers identified breaches incidents of fraud, suspected fraud or cybercrime. While Corporations Act breaches were down from 10 to two suspected breaches, application fraud or suspected incidents of fraud increased from 353 to 545. Only one provider identified cybersecurity incident.
We believe that all such institutions must commit to robust security protocols designed to protect customers and their privacy. These may include various encryption processes (including SSL Certificates) to secure data against misuse, interference and loss, unauthorised access, disclosure and modification.
5. The default rate has increased slightly
According to the report, ‘the average default rate for the 2017–18 financial year, weighted by dollar amount, was 2.9%, representing an increase of 0.7 percentage points on the 2016–17 financial year. Meanwhile, default rates varied across providers from 0 to 7% for consumer loans, compared to 0 to 3.4% in the 2016–17 financial year.
Although most marketplace lenders had fewer than 1% of loans in default, the risk of losing principal or interest owed in a more uncertain economic environment may drive investors towards platforms that have implemented models that provide additional measures to protect investors, such as RateSetter’s model where investors benefit from its Provision Fund.
The Provision Fund has an unblemished record for protecting investors against borrower late payments or defaults. We expect it to maintain this track record provided that future losses on outstanding loans remain below 6.0% of current loans outstanding.
ASIC’s survey shows that marketplace lending has now established itself as a credible alternative for investing and borrowing in Australia. The industry should continue to ride the wave of consumers looking for transparent, value-oriented products and therefore continue to take market share from traditional financial institutions.
We predict that, based on the findings of the ASIC report and RateSetter’s own performance, the marketplace lending industry will continue by leaps and bounds in Australia. After all, the data suggests that new investors and borrowers are flocking to the sector
With the three largest marketplace lenders accounting for 86% of outstanding loans, similar to prior years, it also seems the industry make-up is now set.