Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 297

How marketplace lending meets investor needs

The author of the article in Cuffelinks, Investor questions for marketplace lendersdraws attention to the perpetual need for responsible investors to be shrewd and judicious when deciding where to place their hard-earned money. This, of course, is sensible advice.

However, it’s also true that today’s investors face a risk environment of unprecedented complexity. In 2018, the S&P/ASX200 declined by 6.8%. Residential property values are falling and bank deposit rates fail to match inflation. In the last year, the Australian media landscape was dominated by the findings of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, with its revelations of duplicitous lending practices, improper fees, and general misconduct that, by the banks’ own admission, fell far short of community expectations.

The ground between equities and low deposit yields

Needless to say, today’s investors are eager for services that allow them to navigate a relatively safe path between the high-risk allure of equity investments and the lower yields offered by traditional financial institutions, which, for all their perceived stability, too often function as a costly and unduly complex intermediary between lenders and borrowers.

This then is the intersection at which peer-to-peer lending, or marketplace lending, has been able to thrive. At its best, marketplace lending appeals to investors who seek transparency and stability, but still wish for higher returns than would be available to them if they invested in traditional products like bank deposits.

Indeed, the author of Investor Questions for Marketplace Lenders concedes that, on this score, marketplace lending has succeeded. Marketplace lending demonstrates that, when the middleman is willing (or able) to tighten his belt — that is, when he narrows the spread between the lending and funding rates offered by traditional financial institutions — borrowers and lenders both benefit from competitive rates. For example, RateSetter lenders have averaged a return of over 7.5% since launch in Australia in 2014.

But what about risk? Readers of Investor Questions for Marketplace Lenders may conclude that marketplace lending involves an unacceptable degree of exposure. Let's examine this in more detail.

Three ways the lending exposure is addressed

First, many P2P platforms are structured such that investors don’t need take 'all of the risk' upon themselves. For example, several platforms require borrowers to contribute to a provision fund, which exists to protect lenders against the consequences of defaults and missed payments. For this reason, the P2P company RateSetter was able to pay its investors $11 million in interest in 2018 without one of them losing a single cent of capital or interest. Moreover, its Provision Fund has grown to represent over 6.1% of its loan book, which is substantially more than the losses it has experienced to date (approximately 1.4%), and its expected future losses. It gives investors a higher degree of confidence in their future returns.

Second, the risk involved in marketplace lending is further mitigated by the historical resilience of consumer credit itself as an asset class. Interestingly, even during a severe economic depression, the annualised loss experienced in consumer credit rates has tended to be less pronounced than with other forms of credit, such as commercial loans and investment property loans.

Automotive finance, for example, performs particularly well. Borrowers tend to prioritise paying off a secured car loan over other debts, which is unsurprising given that they need their car to get to work, attend interviews, and maybe even take the kids to soccer practice.

Finally, it’s misleading to imply that loans financed by marketplace lending bear any inherent resemblance to the type of subprime loans that gained widespread notoriety following the financial collapse of 2008. This false equivalence overlooks the crucial role played by marketplace lending platform operators when it comes to assessing the creditworthiness of prospective borrowers. Responsible operators subject loan applicants to a screening process that takes into account the very same factors any traditional financial institution would scrutinise, from credit histories to monthly income versus expenses.

Growing role in intermediation

In short, marketplace lending offers a simple way for investors to access consumer credit. As they continue to offer strong returns, Australian marketplace lenders are growing rapidly into the ~$140 billion consumer credit market. Ultimately, we expect that marketplace lending models will come to represent a significant and structurally important part of our financial system. This will likely involve marketplace lenders acting as a conduit between superannuation funds (both SMSFs and larger industry funds) and consumers seeking credit.

The evidence for this imminent transformation can be seen in specific examples of institutional participation. For example, RateSetter attracted $100 million in support from the Government’s Clean Energy Finance Corporation, which sought assistance with its expansion into consumer finance. As a result, RateSetter is now the largest funder of consumer loans for the purchase of renewable energy equipment, such as solar panels and home batteries.

We expect to see similar developments over the coming decades as marketplace lending moves into the mainstream. Its growth will now depend on the rate at which new investors and borrowers learn of the benefits that marketplace lending can offer them.

 

Daniel Foggo is CEO of RateSetter, Australia's largest peer-to-peer lender, and a sponsor of Cuffelinks. This article is for general information purposes only and does not consider the circumstances of any investor.  Investors should make their own independent enquiries and consult with a financial adviser.

For more articles and papers from RateSetter, please click here.

RELATED ARTICLES

Daniel Foggo on why P2P lending is not what you think

Five key ASIC findings on marketplace lending

Risk vs reward: How do P2P lenders stack up?

banner

Most viewed in recent weeks

Retirement is a risky business for most people

While encouraging people to draw down on their accumulated wealth in retirement might be good public policy, several million retirees disagree because they are purposefully conserving that capital. It’s time for a different approach.

The perfect portfolio for the next decade

This examines the performance of key asset classes and sub-sectors in 2024 and over longer timeframes, and the lessons that can be drawn for constructing an investment portfolio for the next decade.

UniSuper’s boss flags a potential correction ahead

The CIO of Australia’s fourth largest super fund by assets, John Pearce, suggests the odds favour a flat year for markets, with the possibility of a correction of 10% or more. However, he’ll use any dip as a buying opportunity.

The challenges with building a dividend portfolio

Getting regular, growing income from stocks is tougher with the dividend yield on the ASX nearing 25-year lows. Here are some conventional and not-so-conventional ideas for investors wanting to build a dividend portfolio.

How much do you need to retire?

Australians are used to hearing dire warnings that they don't have enough saved for a comfortable retirement. Yet most people need to save a lot less than you might think — as long as they meet an important condition.

Welcome to Firstlinks Edition 594 with weekend update

It’s well documented that many retirees draw down the minimum amount required and die with much of their super balances untouched. This explores the reasons why and some potential solutions to address the issue.

  • 16 January 2025

Latest Updates

Investment strategies

UniSuper’s boss flags a potential correction ahead

The CIO of Australia’s fourth largest super fund by assets, John Pearce, suggests the odds favour a flat year for markets, with the possibility of a correction of 10% or more. However, he’ll use any dip as a buying opportunity.

9 ways to fix Australia's housing crisis

Decades of policy failure have induced a fall in housing affordability. Unless painful changes are made, an underclass will emerge in a society that is supposed to boast the one of the world's highest standards of living.

Shares

Australia: why the chase for even higher dividend yields?

Australia boasts one of the world's highest dividend yielding sharemarkets, providing substantial benefits to investors and retirees. Despite this, individuals often stretch for even more yield, to their detriment.

Shares

MIGA – Make Income Great Again

The Australian sharemarket seems to be rewarding a number of unprofitable companies on the promise of future riches. Yet profits and cashflows still matter, as a recent case study of Domino's Pizza shows.

Shares

Mapping future US market returns

Exceptional returns from the US sharemarket over the past decade have driven by sales growth, margin expansion, rising valuations, and dividends. Predicting future returns requires careful consideration of these factors.

Shares

Read this before you go all in on US equities

US equities rule global markets, but history is littered with examples of markets that seemed invincible — until they weren’t. Diversification will be key for investor portfolios going forwards.

Property

What impact would scrapping stamp duty have on housing?

Increasing house prices pose challenges for housing affordability. This investigates the impact of stamp duty on the property market, and how removing the tax could help address several key issues.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.