It is clear that there is a lot of focus on the Australian market, both domestically and from offshore players. With many new platforms opening up, as well as people who have declared their intention to set up platforms.
There are established players such as RateSetter, ThinCats and SocietyOne and the more recently launched Marketlend. While US entrants OnDeck and Kabbage will be here soon and SpotCap from Europe has announced their intention to participate locally lending to SME. We have also seen a host of smaller platforms launching since January. There is a chance that there are too many platforms opening up and many will not do as much business as they are aiming for. Especially as the bigger platforms have the experience and infrastructure of their parent platforms.
“Unlike the States where you have a lot of sub-asset classes but here you really only have consumer side and small business side and maybe a little bit of property, but mainly first two. And I’m not convinced all these people can do as much business as they would like to, the SME sector is now looking potentially a little crowded.”
The other problem, of course, is that investors may be reluctant at first to put their money with smaller platforms and so this provides an advantage to the larger international companies. With these larger platforms you have the assurance that their credit model works, if they have been operating for over a year/ 18 months, whereas you don’t get that with a start-up. Having an established credit model gives borrowers an added level of comfort.
Glenn mentioned that he was uncertain about the quality of information small platforms can assess:
“In Australia we don’t have FICO scores in the same way as the US. It is only recently where we have seen the introduction of CCR (Comprehensive Credit Reporting). This allows lenders to share positive data including account and repayment history info with credit bureaus. RateSetter I believe is the only local platform fully utilizing this.”
Moving onto the regulatory system. RateSetter is still the only platform that allows retail investors to buy its loans. Glenn said that he thought once RateSetter had been granted regulatory approval, it would have made it easier for other platforms to be approved. But actually all of the platforms are so diverse with very different business models; it still remains a long and complicated process for any of them.
The question is then whether the regulators are supportive of the peer-to-peer lending space or putting up barriers to growth.
“I think the regulators recognise the barriers they put in place and expect people to jump over are probably too high for a lot of platforms, especially the smaller ones. The costs of getting regulatory approval, legals etc are very expensive, particularly because it’s complex and can take upwards of a year. For a start-up this is tough, these are the similar barriers that they’ve imposed for banks and other lending organisations. However, the regulators don’t want any perception that they are making it easy for people to get involved in new lending markets, and they most of all want to be protecting the consumer. It is a fine line for them to tread and hard to know when any meaningful change will come. It will be interesting and really positive to see whether they change their course over the next 12 months”.
It is also worth noting that recently interest rates in Australia have been cut to record lows, down to 2%. This means investors are yield hungry and so it is the perfect time for P2P to be starting up in the country. The interest rate cut is being used to try and stimulate Australia’s commodity driven economy, which has been hit hard by the slow down in demand from China.
However, the flip side to this drive to stimulate the Australian economy is that these rate cuts are fueling a property bubble in many Australian cities. Most of this is being generated by speculators, both Australian and those off-shore. Glenn has watched the RBA (Reserve Bank of Australia) cut rates to all time lows, as he says:
“Each 0.25% cut is not going to be the real driver that makes people borrow and spend, particularly for first home buyers, battling rising property prices. They will do that when they have an assurance that the economy will be getting better in the future, when they are secure in their jobs and can assume that they will be able to pay the interest back in the future.“
However, the problem now lies in educating yield hungry investors about peer-to-peer lending and letting them know that this option is available. It is evident that in Australia there is little awareness from the man on the street that peer-to-peer lending even exists. The platforms have a large role to play in educating these potential investors and making sure they understand what the options are.
“The one platform that is doing an outstanding job on marketing is RateSetter Australia. However, education can’t come from one platform alone and the others will need to weigh in to help increase awareness, which is what market experts such as Ron Suber of Prosper say. Ron is constantly talking about the obligation all participants in Marketplace Lending have to raise awareness, increase understanding and improve education. These are critical factors for all parts of the globe but none more than here and now in Australia. Australian platforms need to undertake a concerted marketing effort in order to educate people that they have alternative finance options.”
It is important that the sector is covered in the mainstream press to allow it to reach a wider audience. As Glenn mentioned, “It is also necessary that the rhetoric in the press shifts to a more mature message of not just being anti-bank but to describing P2P lending as a genuine alternative option for people’s financing needs.”
It is hard to say what stage the industry is at but it is clear that it is still in its infancy compared to the US or UK. The pace of development in Australia seems to be slower than was first expected. Many of the platforms are struggling to find borrowers. It comes back to the education theme – that people need to know that this option exists. The platforms are well funded with institutional money but need to find the right people to lend to. They need to develop a demand generated business model and that will take time.
“The Australian market is still very new and we are right to have big expectations but we are wrong to think that growth will happen overnight. Also, for whatever reason, there seems to be a big focus on Australia perhaps because it is one of the few new markets but sometimes it has to be put into perspective that the four Australian banks have a huge dominant market share. We are a country of only 23 million people and I think people have to step back and think about how much business everyone is really going to get. Especially if they are all going after the high net worth individuals, and there must be only 450,000 of them. And it’s not like the US where there are 260 million people or Europe where they are many countries to target. We are right to be excited about it. And perhaps we should put our expectations in perspective as market awareness needs to happen and more people need to understand the product for it to really take off.”
It is easy to forget the challenges faced by an industry in its infancy, especially when you are looking at it from an outsider’s perspective, from a country that has a more established market. The debate is whether each market only needs three or four credible platforms to cover the needs of the borrowers and investors, or whether the market can thrive with many platforms operating. In Australia there are already four larger platforms, which would include Society One, RateSetter,ThinCats, Direct Money and perhaps OnDeck once established, platforms in operation. It will be interesting to see how the small platforms perform and if they manage to snag enough business to be sustainable.