Peer-to-peer lenders claim to be recession proof

IX view: commentators with a bank perspective tend to miss the key fact that assets and liabilities are perfectly matched on peer-to-peer platforms like ours - unlike banks. And in our case, the average exposure is less than 60 days.
The charge that the growing number of non-banks that use online platforms to directly connect borrowers with lenders might not survive a recession is rejected by these new entrants.This group claimed that peer-to-peer lending, crowdfunding and other alternative financing methods rose to prominence during the global financial crisis.

In the last seven years they have plugged a gap left by banks whose credit models prevented them from lending to some customers.

Yet, ANZ boss Mike Smith and Commonwealth Bank chief, Ian Narev, have slammed peer-to-peer lending as untested in an economic downturn or when interest rates were high.

Both questioned who would be responsible if customers were burned and both raised the issue of liquidity risk.

Products of the GFC

According to MoneyPlace chief executive, Stuart Stoyan, the high-profile bankers' comments were not only wrong but short-sighted.

He said the peer-to-peer lending model is better able to cope with changing economic conditions than incumbent banking systems.

Stoyan acknowledged that peer-to-peer lending is a new banking model and has not endured a downturn in Australia. But he also noted that Australia has not suffered a significant recession for over a quarter of a century.

“On the same logic, since the last serious recession was 25 years ago, it would be also fair to argue that the management teams of the major banks are also untested to manage during a recession," he said.

Test of business models

Three of the world’s largest peer-to-peer lenders were operating during the last financial crisis and each proved their ability to provide investors with positive returns on a through-the-cycle basis, according to RateSetter chief, Daniel Foggo.

“They have found ways to help ensure positive returns can be delivered in any economic environment. In the case of RateSetter, we pioneered our Provision Fund, which is a pool of capital available to compensate lenders if they are exposed to a borrower default," he said.

"Our first priority is ensuring that enough money goes into the Provision Fund to protect investors, in good economic times and bad.

“Our business model is very efficient, and we pass on the savings to borrowers in the form of substantially lower rates. If interest rates went up significantly, it’s very unlikely there’d be an impact on our business”.

Another claim is that peer-to-peer lenders have less expertise than the major banks and are therefore more vulnerable to financial instability.

“That is wrong,” said Stoyan. “Peer-to-peer lenders in Australia are mostly led by former bankers who understand the deficiencies in the outdated banking system.”

Liquidity not applicable

MoneyPlace is managed by four ex-National Australia Bank executives; its chief risk officer previously ran unsecured lending for NAB.

Prior to joining RateSetter, Foggo ran Barclay Capital’s investment arm and worked for NM Rothschild in London. SocietyOne has hired an Investec operative.

Stoyan dismissed suggestions of liquidity risk, saying that a liquidity event is not applicable to P2P lenders since an event can only occur there is a surge in demand for deposits.

For example, a run on a bank occurs when bank customers withdraw their deposits because they believe the bank might fail. This is an issue because the banks do not hold a dollar in cash reserves for every dollar they have on deposit, they lend it out.

“Peer-to-peer lenders directly match investors’ money to a loan. This means that these lenders are fully funded 100 per cent of the time," said Stoyan.

“Further, banks run complex treasury functions that try to minimise the amount of cash they hold so they can earn more profit lending it out. However, peer-to-peer lenders do not have a treasury function.

"If they don’t run a book, they do not need to manage liquidity. In fact, because we directly match investors and borrowers, we will never face a liquidity event. To suggest otherwise is scaremongering."

Level of transparency

“The concept of illiquidity for a peer-to-peer lender would only arise if investor expectations for the term of the investment were not matched by the term of the loan," said Leo Tyndall, chief executive and founder of Marketlend.

"In peer-to-peer lending, it is the investor who chooses his term and it is matched to the loan's term so there is no issue."

Foggo said RateSetter extensively stress tests its loan book as well as any bank, but more importantly, it provides a level of transparency to investors so they can make their own assessments.

Regulators are ensuring an appropriate level of regulation and oversight for peer-to-peer lending, Stoyan added.

Dermot Crean

Director, InvoiceX

Growth Capital on Demand.

(03) 9020 4161