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Morgan Stanley says peer-to-peer loans will soar to $22b in Australia by 2020, peer to peer loans.#Peer #to #peer #loans


Morgan Stanley says peer-to-peer loans will soar to $22b in Australia by 2020

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Peer to peer loans Morgan Stanley predicts P2P volumes in Australia will soar to $22 billion by 2020. Photo: Karl Hilzinger

The value of loans made through peer-to-peer lending platforms in Australia will surge to $22 billion in the next five years, investment bank Morgan Stanley predicts – crimping the profits of the big banks and forcing them to speed up investment in new technology.

By 2020, P2P lending to Australian consumers will soar to $10.4 billion and comprise 6 per cent of total consumer lending in Australia, suggesting the investment in Australian market P2P leader SocietyOne by media moguls James Packer and Ryan Stokes in December was well-timed.

In addition, P2P lending to small businesses would grow to $11.4 billion over the same period, Morgan Stanley said, at rates of growth faster than consumer credit, given constraints on big bank lending to SMEs.

P2P lenders, who are increasingly being referred to as “marketplace lenders” to reflect growing institutional funding of the loans, provide technology platforms that match borrowers with investors, offering both sides more attractive interest rates than banks.

Morgan Stanley estimates that less than $25 million has been lent to consumers so far by SocietyOne and competitor RateSetter. A third P2P lender, MoneyPlace, is preparing to launch. Marketlend and UK-based Thin Cats are also in the Australian market offering P2P loans to small businesses but P2P SME lending so far has been negligible.

Morgan Stanley said in a recent “Blue paper”, which received input from its Australian bank analysts Richard Wiles and Matt Dunger: “We believe there is an opportunity for P2P lending to establish a meaningful presence in Australia due to high online/mobile banking penetration, growing margins and high returns in unsecured lending and a highly concentrated banking industry focused on mortgages and deposits rather than on consumer unsecured [lending].”

Morgan Stanley said it expected SocietyOne, which launched in August 2012, to ultimately raise money from retail investors and expand the products and types of loans available to borrowers. The investment bank said it understood SocietyOne had received loan demand over its platform of about $100 million since launch and loan balances were now below $25 million.

Customer acquisition a key challenge

Much of the growth in borrower demand at SocietyOne had been driven by interest rate comparison sites such as RateCity, and the conversion rate of lending was relatively low, Morgan Stanley said. It highlighted raising awareness and acquiring customers as key challenges, because the big banks already had lock-up deals with consumer-facing companies like Qantas, Woolworths, and Coles.

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Strategic alliances to acquire customers would become more widespread, the report said. In March, Carsales.com.au and its joint venture Stratton Finance took a combined 20 per cent stake in RateSetter Australia. OnDeck, an online lender not using a P2P model, launched in Australia last month with a 30 per cent stake and distribution agreement from recently relisted small business accounting software provider MYOB.

Morgan Stanley highlighted a series of other risks to its view that P2P would take off. One was regulatory scrutiny by the Australian Securities and Investments Commission, “which could limit the growth prospects for retail funding of marketplace models”.

It also pointed to the sustainability of the business model through a downturn, a criticism made by Commonwealth Bank of Australia chief executive Ian Narev at The Australian Financial Review‘s Banking & Wealth Summit last month. “Unlike the US and UK, there is no real-life scenario that can be used to ‘stress test’ potential credit losses,” Morgan Stanley said.

The strength of the Australian banking oligopoly might also restrict P2P growth. “We believe that the major banks have more than enough financial strength to compete aggressively with P2P lenders or to attempt to replicate their technology and pricing models, if they choose to do so,” the investment bank said. However, it added: “At this stage, we doubt that the response will be particularly quick or aggressive.”

Banking ‘largely undisrupted’, says Packer

Some astute investors also believe Australia’s banks will be slow to respond to the P2P threat. Mr Packer said when investing in SocietyOne in December that “banking is an area that has been largely un­dis­rupted” and “that doesn’t make much sense given its profitability and margins”.

Other investment banks have also highlighted the size of the disruption being faced by Australia’s big banks, after customers moving online savaged the media and tourism industries. Last year, Macquarie Group estimated almost 30 per cent of the annual revenue of the major banks – or $27 billion – could be picked off by new players including P2P lenders in the long term.

In its report, titled Global marketplace lending: Disruptive innovation in financials, Morgan Stanley said there was a strong precedent in Australia for banking disruption, because mortgage brokers had had a material impact on the structure of the mortgage market and the margins that big banks earn on their home loan portfolios.

It pointed to an expansion in the margins of big banks’ consumer unsecured lending books by more than in any other major product segment since the financial crisis and the lack of innovation in unsecured personal loans. It also said that the move towards comprehensive credit reporting would help P2P players by allowing them to better assess borrowers’ creditworthiness.

Global P2P could hit $US490b by 2020

The arrival of P2P is a global dynamic and the report highlighted surging volumes in the US, where P2P lender origination has doubled every year since 2010 to $US12 billion ($15.2 billion) last year, but still represents only 1.1 per cent of total US consumer unsecured loan originations. The bank said this could reach 10 per cent by 2020, helping the global P2P market grow to between $US150 billion and $US490 billion by 2020.

Loan originations were being “turbo-charged” by institutional funding of loans, which made the term “peer-to-peer” a misnomer, Morgan Stanley said, adding that “marketplace lending” was a better description.

The report predicted more deals between global banks and P2P lenders, especially small and mid-sized banks, which have been losing market share to large banks over the past decade and have been working with online lenders to benefit both parties. This could evolve to a “lending-as-a-service” (LaaS) model, in which certain bank functions like credit underwriting, customer prospecting, and originations could be outsourced to marketplace lenders.

Research into bank customers had revealed millennials (born after the early 1980s) favoured fast, convenient, and cheaper credit and were more brand agnostic. Therefore, as incumbents’ key customers are getting older, maintaining market share would depend on investing in speed, faster/broader decision-making, and leveraging social media to improve the customer experience, Morgan Stanley observed.

In Australia, Morgan Stanley said the profitability of the big banks’ backbook reduced the likelihood that they would respond to the P2P threat by adopting “risk-based pricing” and they were more likely to focus on digital offerings.

“It is too early to tell how banks in Australia will respond given that marketplace lending has only just taken off,” it said. “However, we note that the major banks have been focused on developing their online and digital offerings, suggesting that they want to match the service proposition and ease of application provided by the marketplace lenders, even if they are unlikely to compete on price.

“In our view, the major banks will tolerate some loss of share to P2P lenders, rather than adopt risk based pricing for personal loans and credit cards. The high returns and profitability of their in-force portfolio mean that they are more prepared to sacrifice volume than price.”


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