Peer-to-peer lending is still in its infancy in Australia but investment bank Morgan Stanley is forecasting rapid growth in the coming years.
High mobile and online banking penetration in the Australian market are characteristics driving the growth in P2P consumer lending, which the bank expects to hit $10.4 billion by 2020.
It expects the value of loans made through P2P lending platforms in Australia will surge to $22 billion and the total addressable market to grow to $87 billion over the next five years. The total market is currently around $75 billion, with unsecured consumer debt making up around 9% of total household borrowing.
But Australia’s P2P market will be minuscule compared to the equivalents in the USA and China, which Morgan Stanley expects could make up as much as 10% of unsecured consumer and small business lending by 2020. It’s estimating the total global marketplace lending industry to be worth between $150 billion and $490 billion by 2020.
These two charts show the growth of P2P lending around the world.
Emerging players like SocietyOne in Australia and LendingClub in the US are driving incumbent institutions to reinvent their lending offerings and take a look at price and service, especially around unsecured personal loans, which have hardly changed in the past decade.
“Over time, many marketplace lenders might see the relationship between themselves and banks evolving into a lending-as-a-service (LaaS) model, where banks outsource certain functions such as credit underwriting, customer prospecting, and originations to marketplace lenders that can perform these functions more efficiently,” Morgan Stanley said in a recent report.
“The fastest growing marketplace platforms are not really peer-to-peer but institutional investors partnering with tech platforms to cherry-pick borrowers, often with offline marketing.”
In Australia SocietyOne has managed to attract a strong cohort of shareholders including Reinventure Group (the venture capital arm of Westpac), News Corp, and companies controlled by both James Packer and Kerry Stokes.
According to Morgan Stanley, since SocietyOne launched in 2012 it has received loan demand of around $100 million and its loan balances are currently about $25 million.
“In time, we expect SocietyOne to raise money from retail investors and expand the products and types of loans available to borrowers,” the bank said.
Given Australia’s big four banks are open to being involved in financial services technology and startups it’s a safe bet they’re watching the market closely. The Commonwealth Bank runs an internal innovation program to build out its digital services and has managed to boost the number of same-day personal loans approved by about 27% in the past 12 months. In addition, its asset finance credit approval times have fallen by approximately 67%.
NAB and Westpac have also been undergoing an internal digital transformation to assist the institutions compete with agile fintech companies.
US-based platform OnDeck recently launched in Australia last month via a $23 million investment for 55% interest in a venture with local accounting software provider, MYOB as well as several other investors including Seek founder Andrew Bassat. The platform is expected to start offering loans to small businesses up to $AU250,000 in the second half of this year. OnDeck CEO Noah Breslow stated that there is a “huge gap between small business financing needs and the availability of capital from traditional sources.”
This can be seen with the disconnect between record low cash rate of 2%, but unsecured loans are still around 14% and up. Morgan Stanley says this gap is exactly where P2P lenders can play, offering rates that are lower than borrowers’ current interest payments while still providing attractive returns to investors fronting up the capital.
The recent inquiry into Australia’s financial system, led by David Murray, supported increased competition in the country’s banking sector. It concluded action should be taken by government and regulators “to support data driven models” and that “the regulatory framework should facilitate financing via the internet.”
Local Australian startup MoneyPlace, founded by several former NAB executives, also plans to start offering loans before the end of the year.