A new bankless banking model is matching tech-savvy investors with people looking for a loan.
Have you ever fancied becoming a banker? Now you can pretend to be one using a peer-to-peer lending platform.
The Government’s overhaul of ageing investment law a few years ago paved the way for new ideas such as online-based ways to raise up to $2 million a year through either crowdfunding or peer-to-peer (P2P) lending. Crowdfunding has grabbed most attention, but P2P has generated a much bigger money flow since the regime was put in place in 2014.
Four platforms – Harmoney, Squirrel Money, LendMe and Lending Crowd – have so far been licensed by the Financial Markets Authority and launched their services. Last month, crowdfunding platform PledgeMe announced plans to join their ranks.
P2P lending, which is done online, matches borrowers and lenders, based on how much risk an investor is willing to take and how likely a borrower is to repay the loan. By removing the cost of running a retail branch network, P2P platforms offer juicier returns for lenders without usurious rates for borrowers.
In New Zealand, the platforms operate in one of two ways. The first, used by Harmoney, LendMe and Lending Crowd, is what is called a fractionalisation model. To reduce risk, an investor’s capital is spread across different borrowers that fall within the lender’s credit profile rather being packaged as a single loan.
The other, which Squirrel has adopted, is a reserve model: an investor is matched to a borrower on a one-to-one basis. Risk is mitigated with some of the borrower’s interest repayments siphoned into a fund to absorb potential losses.
What makes P2P attractive for borrowers is the ease of signing up: they don’t have to traipse to an office with a truckload of documentation to get a loan. The platforms accept scanned documents, hold interviews via Skype and draw on web-based data to make risk assessments.
The lending rates on Harmoney’s personal loans range from 9.99% for the most creditworthy individuals to about 40% for the riskiest. The latter may sound like loan-shark territory, but most finance companies charge interest of about 15% for personal loans, rising to 30% for pay-day-style borrowing from a second- or third-tier lender.
John Kensington, KPMG’s head of financial services, says the typical borrower has a strong credit history and will pay a little more to avoid extra paperwork to top up their mortgage, or may be a young person who hasn’t borrowed money before but isn’t considered high-risk.
“It’s people with no credit history, or who just don’t want the hassle of going back to the bank, or maybe some who don’t want the bank to see everything they’re doing,” he says.
Record low interest rates, new technology, solid jobs growth and a lingering suspicion of banks since the global financial crisis have helped Harmoney lend more than $100 million in its first year – a level that would satisfy most finance companies, says Kensington.
Still, he doesn’t think P2P lending has been fully tested yet and expects that some investors don’t understand that there will inevitably be missed repayments by higher-risk borrowers.
The typical investor might be expected to be older, cashed-up and financially literate. But although there has been interest from people who fit that profile, young, tech-savvy types have been fast adopters. They are attracted by higher returns over bank deposits and like doing business online, Kensington says.
Goodlife Advice financial adviser Daniel Carney has dabbled in P2P and set up a blog to share his experience. He calls it “hobby investing”, because he’s only committed small amounts so far, earning an annual 16.9% return.
“I know I’ll get defaults and have people run away and not pay their loans, but I’m comfortable that if I have enough spread of risk that I’ll get a good return on investment,” he says.
Although Carney doesn’t advise clients to try P2P lending, he envisages a time when it could be part of a diversified investment portfolio.
One thing investors need to remember is their money is tied up for the length of the loan. Until a secondary market is set up, once in they’re there for the long haul, good or bad.
Show me the money
THE FIVE P2P PLATFORMS
This is the first and biggest of the local peer-to-peer players. Its shareholders include Heartland Bank and Trade Me, and until recently, veteran director Rob Campbell was chairman. The company is expanding into Australia with a $200 million funding line from UK-based lender P2P Global Investments. Harmoney attracted more than 3000 lenders and about 8000 borrowers in its first year. Its average account balance is $6000 and the realised rate of return across all loans is 12.2%.
The second P2P operator to be licensed, LendMe opened its doors in November and focuses on secured lending against a borrower’s assets, such as property. It’s targeting loans to the rural sector and retirees with strong credit histories and assets to use as security. Last year, the company said it was in talks about aligning itself with a bank, but it has made no further announcement on that front.
- Squirrel Money
The third licensed platform was launched in November and touts itself as an authentic peer-to-peer lender as it doesn’t use bank funding. Squirrel avoids borrowers with a poor track record and is using a reserve fund to mitigate lender risk. The platform is owned by former ANZ executive John Bolton, who set up Squirrel Mortgages, Auckland’s largest mortgage broker.
- Lending Crowd
Lending Crowd, which was fourth to launch, is owned by Wayne Croad, Finance Direct’s major shareholder, and is concentrating on car and personal loans and lending to small- and medium-sized businesses. Lending Crowd has said its loans will be secured by vehicles, a second security over commercial or residential property, or a combination of the two.
Established crowdfunder PledgeMe wants to extend its experience into P2P lending. Organisations borrowing money through the platform will be able to offer investor rewards beyond interest repayments, similar to PledgeMe’s crowdfunding campaigns. Provided PledgeMe gets a licence, it expects to go live by mid-year, and won’t be seeking bank funding to finance loans.
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