In August 2011, Matt and Greg Symons (no relation) co-founded Australia’s only currently active P2P lender, SocietyOne http://www.societyone.com.au. Whilst working in San Francisco, where two of the large online P2P marketplaces in the US are headquartered, Matt was exposed to P2P for the first time . He returned to Australia in 2010 and was introduced to Greg, who was in the process of reengineering his loan origination and receivables management platform Clearmatch towards the emerging P2P lending industry. Clearmatch is a comprehensive banking solution that had been formerly licensed to a number of banks and finance companies in South Africa, The Netherlands, New Zealand and Australia, managing more than a billion dollars in consumer portfolios.
SocietyOne was officially launched in August 2012, powered by Clearmatch technology.
Matt and Greg saw an opportunity to build a better borrower experience by leveraging this proprietary banking-grade P2P lending platform and bringing some pretty serious innovation to the personal loans (and niche business loans) category. They understood there was a clear and growing acceptance amongst savvy online consumers for better, smarter and faster banking solutions and in particular, personal credit alternatives that offered a better and more empowering user experience.
The challenge in Australia was that shopping around for the best rate on a loan from different credit providers can be a punitive process. When lenders do a credit check, they leave an enquiry on the applicant’s credit report that has an immediate and negative impact. This affects the creditworthiness of borrowers in the eyes of the next credit provider.
Regardless of your credit profile, the banks do not recognise that each personal borrower is different and present different levels of risk– in the end, everyone pays the same high interest rates.
Why, do Australian Banks do this? I personally believe because they can. Because they make so much money from unsecured personal lending, borrowers have little alternative. The Australian banks are the dominant players and while they all have similar business models – why change?
Currently lending through SocietyOne is only for “Wholesale Clients” as defined by ASIC (http://www.asic.gov.au/asic/asic.nsf/byheadline/Certificates+issued+by+a+qualified+accountant). That is, Retail investors cannot currently access the platform.
The Australian Regulator remains cautious with their view that they want Retail investors to be very aware of the investment risks of P2P lending. During the GFC the Australian Government introduced a government guarantee on all deposits < $100,000 held with an Australian Bank. P2P lending is not covered by these deposit guarantees.
Another risk that APRA the Australian regulator is trying to mitigate, is the risk of investing in a poor credit. According to SocietyOne, only about 14% of applicants looking to borrow on their platform meet their stringent credit criteria. The early-stage business strategy seems to have been to prove the viability of the model and to ensure strong investment performance to provide investor confidence in the process. Eventually for SocietyOne, this confidence should provide a foundation on which to launch a comprehensive retail offering in late 2014. As of June 2013 SocietyOne’s default rate was only 2.3%.
Credit Assessment of the Borrowers
Those seeking loans on the SocietyOne platform will need three months’ worth of transactional bank statements, allowing the company to assess capacity to repay. Their Clearmatch platform also looks at a borrower’s true spending patterns giving them a clearer picture of the credit risk of the applicant. Once a borrower is approved, SocietyOne assigns them a credit risk category from A to D and a sliding scale interest rate. For example, SocietyOne A-rated borrowers can currently receive an interest rate of 9.95 per cent to 11.20 per cent, while D borrowers receive 14.1 per cent to 15.6 per cent.
Investors are able to bid for fractions of loans within this interest rate range for each credit risk category. SocietyOne collects a 1.25 per cent “receivables management fee” as part of the interest rate paid by the borrower, and an average 3.5 per cent loan establishement fee. Borrowers only pay the establishment fee, which is currently being waived for all customers, if the loan is approved, fully funded and drawn-down. The origination fee varies based on the credit category (1.5 per cent for AA to 4.5 per cent for D) and is applied as a percentage of the total loan. Late payment fees are equivalent to banks; there are no servicing fees and no pre-payment fees.
Investor funds are managed through a Trust, a wholesale unregistered managed investment scheme. The bankruptcy remote trust is a Special Purpose Vehicle that protects the interests of investors (as members of the Trust) against an insolvency of SocietyOne prior to making loans or on the repayment of loans.
When an investor logs on to SocietyOne’s platform, they can see the loans needing to be funded, but any personal identifiable information of the borrowers is not shown to protect their privacy. They can access more information if they require, including geolocation, cash-flow summary and an explanation of why the borrower requires the money.
As Matt says, “Peer-to-Peer lending is the future of online banking and we’re seeing a lot more people consider P2P lending as an attractive option. SocietyOne is a real bank alternative: we can offer borrowers the benefit of access to market pricing and investors the opportunity to build a diversified portfolio of unsecured consumer credit with steady cash flow. Traditionally, investors haven’t been able to participate in unsecured consumer credit as an asset class.”