When Bill Gates voiced his now oft-quoted epigram “banking is necessary; banks are not” in 1994, I wonder if he knew exactly how right his words would prove to be.
I have a feeling he may have.
More than 20 years later, banks are becoming less and less relevant. A rapidly increasing number of disruptive services are appearing in the space traditionally left to conventional banks, whose market share is eroding.
Arguably one of the most innovative practices in disruptive banking services internationally, including in Australia, has been the emergence of peer-to-peer (P2P) services – mainly in lending.
Simply put, P2P lenders are not lenders at all, but rather they provide a service matching private investors with potential borrowers.
Of course, the industry is much more advanced than that.
In offering their lending service, P2P companies have developed their own cloud-based platform that includes a proprietary credit assessment model, an investor qualification program to ensure compliance with legislation and post-settlement management services.
Small, short-term, consumer-based lending has gained the most attention from these providers, with Nimble, SocietyOne and RateSetter probably making up Australia’s top three lenders in this space.
Of these, RateSetter is the only Australian platform licensed to accept registrations from retail investors, while the others are limited to dealing with wholesale clients only. As a result, it could be argued that they are perhaps a truer representation of P2P lending than their peers, who are limited to dealing with sophisticated or corporate investors.
The next natural domain of P2P lending is lending to small businesses – a space the Australian banks largely withdrew from in 2008. The Labor government at the time attempted to introduce the Australian Business Investment Partnership, coined ‘Rudd Bank’, to support the business community. However, it was unsuccessful. Although it has taken some time, a new wave of P2P-funded lenders such as ThinCats has recently launched in Australia and will be followed by more entrants in the next 12 months.
While the introduction of P2P lending will redefine personal and short-term lending in a similar manner to the way securitisation changed the mortgage lending space forever in the 1990s, it will have almost no impact on the mortgage space. Mortgage lending requires money being borrowed long term, yet P2P funding is traditionally lent for the short term. Whoever can resolve this dichotomy will have a successful business.
Where will P2P take us over the next five years?
I believe we will see not only an increased number of lenders in the small business lending space, but also the continued emergence and adoption of white-labelled platforms as a service option for aspiring P2P funders that do not have the resources to build or manage their own platforms. ClearMatch seems to be a leader in this space and is positioned to capitalise on the opportunity.
An interesting thought is the introduction of P2P insurance services and products. Most likely, this will be an extended service of the P2P lenders already operating, with the inclusion of the insurance risk model inserted into their already tested platforms.
How will the banks react to these changes to the landscape? I expect that rather than directly compete against the P2P lending platforms, banks will become the platforms’ largest institutional investors – or they may even look to acquire them, as they have done with nearly all of Australia’s mortgage securitisers.
If you can’t beat them, own them is the next best option.
ABOUT THE AUTHOR
Troy McErvale is the founder and managing director of Freedom Home Loans and My Personal Lender, a combined mortgage broker and mortgage management business in Australia, started in 2001. Since 2010, the company has offered an expanded service to include mortgages for foreign owners of US property, as well as US property consulting services to high-net-worth clients.