Having spent five years running Aussie Home Loans, the original banking disrupter that brought cut-throat competition to home loans and forced big banks to slash mortgage rates, Stephen Porges has found a new target: the big profit margins banks earn on personal loans.
After his dramatic exit from SAI Global last year amid an internal battle for control as private equity lobbed bids for the standards setter, Mr Porges has re-emerged in the financial services sector as executive chairman of DirectMoney, another peer-to-peer lender allowing customers to borrow directly from investors via an online platform, bypassing the banks.
DirectMoney began organising loans through its internet platform last October and since then $6 million has been lent to borrowers by wholesale investors, at an average loan size of $15,000. DirectMoney will be able to accept loans from retail investors now, after the Australian Securities and Investments Commission granted it an Australian Financial Services Licence on Friday.
P2P lenders would "do to the personal loan market in Australia what Aussie did to the mortgage market", Mr Porges, who joined Aussie as chief executive in 2008 and worked alongside founder John Symond, said.
Since Aussie was founded in 1992, the average interest rate on a mortgage had fallen by 6 percentage points, as a result of competitive pressure applied by Aussie and other competitors, Mr Porges said.
"In mortgages, consumers now get a good deal. But the same disruption has not happened in the personal loan space," he said.
"The real challengers to the banks are specialist fintech players that don't have big infrastructure costs. The banks know many of these fintech start-ups are very interesting business models, and when a range of new technology is put together it will enable better banking."
DirectMoney, which was established in 2007 but put plans to launch the following year on ice as the global financial crisis struck, joins a swelling bunch of P2P lenders to hit the Australian market, including SocietyOne, RateSetter, ThinCats and Marketlend, which have all been licensed by ASIC, and MoneyPlace and Lend2Fund, which are waiting for ASIC to grant licences. Only DirectMoney and RateSetter have been allowed to establish a retail platform.
SocietyOne chief executive Matt Symons observed last year personal lending by the big banks made up only 3 per cent of bank assets but accounted for 16 per cent of retail banking profits. Volume across the nascent P2P industry are minuscule but the potential disrupters hope Australian borrowers will cotton on to their more attractive interest rates, while a sufficient number of yield-hungry investors will be attracted to fund the loans.
While banks might charge interest rates for personal loans of about 15 per cent and rates closer to 20 per cent on credit cards without generally adjusting pricing to reward lower-risk borrowers, DirectMoney says high-quality borrowers over its platform can get loans at 10.75 per cent, with the average rate about 14.75 per cent. Investors in the loans will receive interest of between 8 per cent and 10 per cent.
DirectMoney chief executive and founder David Doust, who spent five years working in Silicon Valley and before that was at Citibank and KPMG, said the company was able to attack part of the margin the bank would usually earn because its technology meant overheads were low. Only about 15 per cent of completed applications would be approved to go on to the platform, to keep credit quality high, as the company targeted borrowers younger than 45, who were less "sticky" banking customers, Mr Doust said.
DirectMoney has won financial backing from New York-based hedge fund Eaglewood Capital Management, which specialises in online lenders and also trades in P2P loans on secondary markets, and by the boutique investment bank Liberum, which is based in London. It raised $500,000 in seed funding in May 2014.
Adcock Group chief investment officer Campbell McComb and former Macquarie Group head of innovation Craig Swanger are on the DirectMoney board. It has 15 full-time staff, including former members of Westpac's credit assessment team and a technology team that worked at IRESS.
PLANS TO FLOAT
The loans made over its platform would ultimately be 70 per cent funded by retail investors and 30 per cent funded by institutions, Mr Doust said. DirectMoney also had plans to float on the Australian Securities Exchange, enabling it to fund with its own balance sheet.
Unlike its competitors, which directly match investors with particular loans or parts of loans, DirectMoney has created a warehouse structure, meaning borrowers, once approved, will be funded immediately out of a pool of funds committed to a particular risk. Unlike SocietyOne, lenders do not bid an interest rate. DirectMoney is also planning to provide lenders with liquidity.
The big banks have contrasting approaches towards P2P. Westpac Banking Corp took a stake last year in SocietyOne through its venture capital fund. But Commonwealth Bank of Australia's head of institutional banking and markets Kelly Bayer Rosmarin has questioned the P2P model, suggesting when interest rates rose P2P lenders might struggle.
Mr Porges said "if rates go up, banks still get the margin and it is the margin that is the problem". He described the key risk for P2P as being "customers' inertia to change from current providers. People have got to get away from that inertia, but it will happen. Australian consumers are financially smart."
Given Westpac's investment in P2P and with CBA buying into Aussie Home Loans the same year he joined as chief executive (it owns 80 per cent now), Mr Porges said DirectMoney did not want to partner too early with a bank, but he recognised that a future deal might be inevitable.
"When you put margin pressure on the banks they have to react, and the big banks reacted to Aussie and Mortgage Choice by buying stakes in them. They think that is how they play in the game."