| Mar 06, 2014
SocietyOne Co-founder Matt Symons says P2P lenders like SocietyOne are placed to offer creditworthy Australian borrowers a better deal. Photo: Michel O’Sullivan
JAMES EYERS, financial services editor, Financial Review
Peer to peer lending has been slow to get off the ground in Australia – the sector’s pioneer SocietyOne, which has just been backed by Westpac’s new venture capital arm, has made just $4 million in loans.
But P2P’s recent growth abroad has been nothing short of astonishing.
The P2P industry originated $US2.8 billion of loans globally last year, according to the International Organisation of Securities Commissions. The biggest player in the United States, Lending Club – whose board includes former US Treasury secretary Larry Summers and former head of Morgan Stanley John Mack – has lent more than $US3 billion since its inception in 2007 as one of Facebook’s first applications. Its loan book has almost doubled in the past six months and it is planning a blockbuster float on US public markets later this year.
In the UK, total P2P lending volumes have just hit £1 billion ($1.86 billion). The British government is a big supporter of the movement and recently provided Funding Circle with £40 million, which will be lent to small to medium business to bolster credit growth.
If P2P lending does take off in Australia – as Westpac’s venture capital fund and other investors in SocietyOne’s $8.5 million capital raising, including KKR’s local head Justin Reizes, believe that it will – it will, in part, reflect the failure of the big four banks to adapt their personal loan products to changing times. The banks’ one-size-fits-all approach to personal credit penalises good-quality borrowers, who typically receive the same interest rate as poor ones, effectively subsidising them.
For the banks, the status quo has been highly satisfactory; according to figures from the Australian Prudential Regulation Authority, retail banking makes up 42 per cent of banking profits, with personal lending (credit cards and personal loans) comprising 16 per cent of retail bank profits. On last year’s profit numbers for the big four, this represents almost $2 billion.
PERSONAL LENDING PROFITS TARGETED
It’s these personal lending profits that SocietyOne and other P2P lenders are targeting. Borrowers, especially those of high credit quality, can receive from a P2P platform lower rates for a personal loan or credit card with an improved customer experience than banks offer. Investors, meanwhile, make a flexible, short-term commitment and receive a better yield than many fixed-income products by targeting one of the most profitable lines of banking – the provision of personal loans.
In order to attract investors onto its P2P platform, SocietyOne is incentivised to conduct thorough credit checks of applicants before accepting them. It uses its proprietary technology platform, known as ClearMatch, to assesses the creditworthiness of potential borrowers by using algorithms .
For the $4 million of loans made by SocietyOne, it has assessed applications for loans totalling $26.5 million. This approval rate of around 13 per cent is about half the number of traditional banks for first-time customers.
This scrutiny is designed to increase the investment performances of the early vintages and provide investor confidence. So far its credit checks are only putting forward reasonable loans; SocietyOne’s default rate is 2.3 per cent.
The ClearMatch technology was developed by SocietyOne co-founder Greg Symons over 17 years. It has had 127,000 hours of development time and more than $10 million invested in it before it was applied to the SocietyOne business in 2012. In its previous incarnation, $1 billion of transactions were put through ClearMatch, including by Rabobank, which used it to manage billions of dollars of agribusiness in Europe. It was orientated towards P2P in 2007. It is this technology that attracted Westpac, with its venture capital fund, to invest in SocietyOne.
SOPHISTICATED INVESTORS ONLY
Only sophisticated investors are able to invest through the SocietyOne platform, although the company is seeking approval to offer loans to retail investors, which it hopes will be forthcoming towards the end of this calendar year.
When an investor logs on to SocietyOne’s platform, they enter an online marketplace, not unlike eBay.
The actual identity of borrowers is not revealed, but before an investor "hits" a loan to fund it, plenty of information is made available to inform their credit assessment: an investor can see a borrower’s suburb (displayed on a Google map); a summary of their personal profit and loss account; various financial ratios, such as debt to income; and the borrower’s explanation of why they want the loan.
The credit assessment process is highly automated. Using the online money centre Yodlee, applicants for loans provide Society One with six months of bank statements allowing SocietyOne to verify income and examine their personal PNL; their proprietary systems analyse statements to determine spending patterns and hence credit risk.
Once a borrower is approved, SocietyOne assigns them a credit risk category from AA to D and a sliding scale interest rate is attached. For example, AA borrowers can receive an interest rate of 10.15 per cent to 11.75 per cent, while D borrowers receive 14.1 per cent to 15.6 per cent.
Investors – who receive an average of 11 per cent interest for funding loans – are able to bid for loans within each band, creating a market for each loan while avoiding irrational pricing.
SocietyOne conducts the day-to-day administration of the loans on investors’ behalf. Its gross revenue is about 5 per cent. This comprises a 1.25 per cent "receivable management fee" from the investor, and an average 3.5 per cent origination fee from the borrower (who only pays if the loan passes the credit assessment and is originated). Late payment fees are equivalent to banks; there are no servicing fees and no prepayment fees.
Investors nominally match their commitments to particular loans but money which comes in from investors is pooled into a trust, a wholesale unregistered managed investment scheme, that provides a single source of money that goes out to borrowers.
TRUST OFFERS ARM’S LENGTH
The trust has been created as a bankruptcy remote vehicle which cannot fund SocietyOne’s liabilities. SocietyOne is the lender of record and loan originator and holds an Australian Credit Licence.
Regulators have been watching the development of the P2P sector closely. The UK’s Financial Conduct Authority is about to issue new rules to govern P2P lending, while the Australian Securities and Investments Commission said last year the consumer credit laws were not a barrier to the P2P model working in Australia. Investments through P2P lenders are not deposits, so are outside the government’s deposit guarantee.
But the International Organisation of Securities Commissions said recently that while the P2P industry globally is too small to pose a threat to financial stability, it did "raise significant investor protection issues, particularly in relation to retail investors".
SocietyOne’s website states that the average investor returns of 11 per cent are not guaranteed and rely on loans being repaid with no impairment.
The government’s comprehensive credit reporting reforms, which come into force next month, are set to benefit SocietyOne as they will let non-banks get more information on individuals’ credit history. This will allow SocietyOne to make a more meaningful credit assessment before moving a loan onto the platform.
Co-founder Matt Symons says these reforms will mean P2P lenders like SocietyOne "are very well placed to offer creditworthy Australian borrowers a better deal and investors direct access to an attractive new fixed income asset class".
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The Australian Financial Review