Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 297

How marketplace lending meets investor needs

The author of the article in Cuffelinks, Investor questions for marketplace lendersdraws attention to the perpetual need for responsible investors to be shrewd and judicious when deciding where to place their hard-earned money. This, of course, is sensible advice.

However, it’s also true that today’s investors face a risk environment of unprecedented complexity. In 2018, the S&P/ASX200 declined by 6.8%. Residential property values are falling and bank deposit rates fail to match inflation. In the last year, the Australian media landscape was dominated by the findings of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, with its revelations of duplicitous lending practices, improper fees, and general misconduct that, by the banks’ own admission, fell far short of community expectations.

The ground between equities and low deposit yields

Needless to say, today’s investors are eager for services that allow them to navigate a relatively safe path between the high-risk allure of equity investments and the lower yields offered by traditional financial institutions, which, for all their perceived stability, too often function as a costly and unduly complex intermediary between lenders and borrowers.

This then is the intersection at which peer-to-peer lending, or marketplace lending, has been able to thrive. At its best, marketplace lending appeals to investors who seek transparency and stability, but still wish for higher returns than would be available to them if they invested in traditional products like bank deposits.

Indeed, the author of Investor Questions for Marketplace Lenders concedes that, on this score, marketplace lending has succeeded. Marketplace lending demonstrates that, when the middleman is willing (or able) to tighten his belt — that is, when he narrows the spread between the lending and funding rates offered by traditional financial institutions — borrowers and lenders both benefit from competitive rates. For example, RateSetter lenders have averaged a return of over 7.5% since launch in Australia in 2014.

But what about risk? Readers of Investor Questions for Marketplace Lenders may conclude that marketplace lending involves an unacceptable degree of exposure. Let's examine this in more detail.

Three ways the lending exposure is addressed

First, many P2P platforms are structured such that investors don’t need take 'all of the risk' upon themselves. For example, several platforms require borrowers to contribute to a provision fund, which exists to protect lenders against the consequences of defaults and missed payments. For this reason, the P2P company RateSetter was able to pay its investors $11 million in interest in 2018 without one of them losing a single cent of capital or interest. Moreover, its Provision Fund has grown to represent over 6.1% of its loan book, which is substantially more than the losses it has experienced to date (approximately 1.4%), and its expected future losses. It gives investors a higher degree of confidence in their future returns.

Second, the risk involved in marketplace lending is further mitigated by the historical resilience of consumer credit itself as an asset class. Interestingly, even during a severe economic depression, the annualised loss experienced in consumer credit rates has tended to be less pronounced than with other forms of credit, such as commercial loans and investment property loans.

Automotive finance, for example, performs particularly well. Borrowers tend to prioritise paying off a secured car loan over other debts, which is unsurprising given that they need their car to get to work, attend interviews, and maybe even take the kids to soccer practice.

Finally, it’s misleading to imply that loans financed by marketplace lending bear any inherent resemblance to the type of subprime loans that gained widespread notoriety following the financial collapse of 2008. This false equivalence overlooks the crucial role played by marketplace lending platform operators when it comes to assessing the creditworthiness of prospective borrowers. Responsible operators subject loan applicants to a screening process that takes into account the very same factors any traditional financial institution would scrutinise, from credit histories to monthly income versus expenses.

Growing role in intermediation

In short, marketplace lending offers a simple way for investors to access consumer credit. As they continue to offer strong returns, Australian marketplace lenders are growing rapidly into the ~$140 billion consumer credit market. Ultimately, we expect that marketplace lending models will come to represent a significant and structurally important part of our financial system. This will likely involve marketplace lenders acting as a conduit between superannuation funds (both SMSFs and larger industry funds) and consumers seeking credit.

The evidence for this imminent transformation can be seen in specific examples of institutional participation. For example, RateSetter attracted $100 million in support from the Government’s Clean Energy Finance Corporation, which sought assistance with its expansion into consumer finance. As a result, RateSetter is now the largest funder of consumer loans for the purchase of renewable energy equipment, such as solar panels and home batteries.

We expect to see similar developments over the coming decades as marketplace lending moves into the mainstream. Its growth will now depend on the rate at which new investors and borrowers learn of the benefits that marketplace lending can offer them.

 

Daniel Foggo is CEO of RateSetter, Australia's largest peer-to-peer lender, and a sponsor of Cuffelinks. This article is for general information purposes only and does not consider the circumstances of any investor.  Investors should make their own independent enquiries and consult with a financial adviser.

For more articles and papers from RateSetter, please click here.

  •   13 March 2019
  • 2
  •      
  •   

RELATED ARTICLES

Daniel Foggo on why P2P lending is not what you think

Five key ASIC findings on marketplace lending

Risk vs reward: How do P2P lenders stack up?

banner

Most viewed in recent weeks

Building a lazy ETF portfolio in 2026

What are the best ways to build a simple portfolio from scratch? I’ve addressed this issue before but think it’s worth revisiting given markets and the world have since changed, throwing up new challenges and things to consider.

Australian stocks will crush housing over the next decade, 2025 edition

Two years ago, I wrote an article suggesting that the odds favoured ASX shares easily outperforming residential property over the next decade. Here’s an update on where things stand today.

Get set for a bumpy 2026

At this time last year, I forecast that 2025 would likely be a positive year given strong economic prospects and disinflation. The outlook for this year is less clear cut and here is what investors should do.

Meg on SMSFs: First glimpse of revised Division 296 tax

Treasury has released draft legislation for a new version of the controversial $3 million super tax. It's a significant improvement on the original proposal but there are some stings in the tail.

Property versus shares - a practical guide for investors

I’ve been comparing property and shares for decades and while both have their place, the differences are stark. When tax, costs, and liquidity are weighed, property looks less compelling than its reputation suggests.

10 fearless forecasts for 2026

The predictions include dividends will outstrip growth as a source of Australian equity returns, US market performance will be underwhelming, while US government bonds will beat gold.

Latest Updates

Economy

Ray Dalio on 2025’s real story, Trump, and what’s next

The renowned investor says 2025’s real story wasn’t AI or US stocks but the shift away from American assets and a collapse in the value of money. And he outlines how to best position portfolios for what’s ahead.

Superannuation

No, Division 296 does not tax franking credits twice

Claims that Division 296 double-taxes franking credits misunderstand imputation: franking credits are SMSF income, not company tax, and ensure earnings are taxed once at the correct rate.

Investment strategies

Who will get left holding the banks?

For the first time in decades, the Big 4 banks have real competition in home loans. Macquarie is quickly gain market share, which threatens both the earnings and dividends of the major banks in the years ahead.

Investment strategies

AI economic scenarios: revolutionary growth, or recessionary bubble?

Investor focus is turning increasingly to AI-related risks: is it a bubble about to burst, tipping the US into recession? Or is it the onset of a third industrial revolution? And what would either scenario mean for markets?

Investment strategies

The long-term case for compounders

Cyclical stocks surge in upswings but falter in downturns. Compounders - reliable, scalable, resilient businesses - offer smoother, superior returns over the full investment cycle for patient investors.

Property

AREITs are not as passive as you may think

A-REITs are often viewed as passive rental vehicles, but today’s index tells a different story. Development and funds management now dominate earnings, materially increasing volatility and risk for the sector.

Australia’s quiet dairy boom — and the investment opportunity

Dairy farming offers real asset exposure, steady income and long-term growth, yet remains overlooked by investors seeking diversification beyond traditional asset classes.

Sponsors

Alliances

© 2026 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.