P2P lending and SMSFs: A beautiful match?
Since the introduction of compulsory superannuation, the Australian financial system has undergone a structural shift. Billions of dollars that would have once accrued in bank accounts are now invested in large superannuation funds and self-managed super funds (SMSFs).
Against this backdrop, our financial system has commenced another structural, technology-enabled transformation.
Together these changes are enabling innovative new businesses, such as peer-to-peer lenders, to utilise efficient technology to cut out traditional middlemen and open up a range of compelling new investment opportunities for SMSFs.
Which investors in Australia have privileged access to the most attractive asset classes? Based on empirical data it could be argued the answer to this question is, perhaps surprisingly, not large fund managers but ‘the banks’. One only has to look at the profits Australian banks make, year-in, year-out, from investing in loans – despite their enormous cost bases and inherent inefficiencies.
Personal loans possibly provide the best example of this privileged access. The average unsecured personal fixed rate loan in Australia is currently over 14% per annum, whilst the average default rate is currently around 2-3%. This implies an average annual return (before operating expenses) to the banks of around 12%, which is very attractive. But what if there is a recession and default rates rise? If you look at the UK and the US data from during the Great Recession of 2008 and 2009, you’d probably be very surprised as to how robustly consumer loans performed.
US GDP growth vs US consumer loan defaults
So, should we be envious that the banks have such privileged access to these loans? I think yes.
A structural shift in balance sheets
Following the implementation of compulsory superannuation in Australia in 1992, there has been an enormous transition in the make-up of our household and national balance sheets. Over $2 trillion of assets that might have otherwise predominantly accumulated as bank deposits or in bank shares now reside in superannuation funds and SMSF trusts. This transition will continue for some time – in fact, the Murray Report forecast superannuation balances to reach $9 trillion by 2040, and that superannuation may overtake banking as the largest segment in financial services.
It should strike us as strange that there has not been a corresponding shift in how the other side of the balance sheet is funded. Given the movement of assets from banks to superannuation, one might reasonably have expected that loans that were historically funded by banks might now be proportionately funded directly by superannuation funds and SMSFs. This hasn’t happened. Yet.
Our technology-enabled era
Technology is moving at breakneck speed. However, in finance, it’s been difficult to see how such technological advancements have really improved the value delivered to customers.
Despite a slow start, we are now starting to see a vast array of exciting technology-led developments in finance. You only need to look at how many exciting businesses have launched in the last few years to compete with incumbents across all areas of finance from payments, to wealth management, insurance and lending. Much as we have seen in industries such as publishing, transportation and accommodation, these disruptive new businesses are delivering better value and providing more convenient services to consumers.
P2P lending – a bridge between superannuation and lending
Arguably the most significant benefit that these advances in technology will bring is a transformation in how our lending markets are funded. Technology advancements mean that a business no longer needs to be a bank to receive loan applications, look up applicant credit scores, assess the risk of a borrower defaulting, or to manage a loan.
Consequently, highly attractive credit classes that were previously monopolised by the banks are now being opened up to other investors. The rewards for these investors could be very significant indeed.
P2P lending – a middle ground for SMSF portfolios
We believe the introduction of P2P lending to Australia provides investors with a much needed middle ground between low yielding property or cash investments, and higher risk equities, which have been especially volatile of late.
These attractive risk-adjusted returns are not going unnoticed. At RateSetter we have experienced a significant increase in SMSF investor interest over recent months, with SMSF funds currently representing around 20% of all funds being invested on our platform.
Looking ahead it is our belief that this trend will continue and that P2P lending will soon commonly feature in any well-balanced SMSF portfolio, which we think will be good for investors, borrowers and the broader economy.
This information does not constitute financial advice and you should consider whether it is appropriate to your circumstances before you act in reliance on it. Any opinions, forecasts or recommendations reflect the judgement and assumptions of RateSetter as at the date of publication and may later change without notice.