In what is believed to be a first for any bank around the world, Westpac Banking Corp's (ASX: WBC) new venture capital fund, Reinventure Group, has taken a $5 million equity stake in Sydney-based peer-to-peer (P2P) lender SocietyOne.
Although the industry was slow to get started, P2P lending has shown incredible growth, originating roughly US$2.8 billion of loans globally in 2013, according to the International Organisation of Securities Commissions.
Based on figures produced by the Australian Prudential Regulation Authority (APRA), personal loans – which include credit cards – make up around 16% of the banks' retail banking profits, adding up to roughly $2 billion for the big four banks combined. P2P lending is effectively targeting these profits by offering customers lower interest rates and a greater customer experience than what the banks can offer.
For instance, while customers can obtain loans from SocietyOne from as little as 11.05% per annum, Commonwealth Bank of Australia's (ASX: CBA) variable rate on personal loans is 13.9%. Australia and New Zealand Banking Group's (ASX: ANZ) is even higher at 14.09%.
The P2P process is quite simple. Individual lenders set their own rates based on the returns that they want and those rates are matched up with appropriate borrowers based on their risk of defaulting. That is, algorithms assess the creditworthiness of borrowers and assign them a lower or higher rate based on the result.
While borrowers receive lower rates, lenders can also recognise a better yield than what they would from most other fixed-income products. Given the thorough assessments made on all applicants before acceptance, SocietyOne's default rate is just 2.3%, giving great confidence to investors on the platform.
Foolish takeaway
While the industry is still small and is yet to truly take off in Australia, it certainly poses a threat to our banks which have for too long maintained their one-size-fits-all approach to personal lending.
