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.

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

Simple maths says the AI investment boom ends badly

This AI cycle feels less like a revolution and more like a rerun. Just like fibre in 2000, shale in 2014, and cannabis in 2019, the technology or product is real but the capital cycle will be brutal. Investors beware.

Why we should follow Canada and cut migration

An explosion in low-skilled migration to Australia has depressed wages, killed productivity, and cut rental vacancy rates to near decades-lows. It’s time both sides of politics addressed the issue.

Are LICs licked?

LICs are continuing to struggle with large discounts and frustrated investors are wondering whether it’s worth holding onto them. This explains why the next 6-12 months will be make or break for many LICs.

Australian house price speculators: What were you thinking?

Australian housing’s 50-year boom was driven by falling rates and rising borrowing power — not rent or yield. With those drivers exhausted, future returns must reconcile with economic fundamentals. Are we ready?

Retirement income expectations hit new highs

Younger Australians think they’ll need $100k a year in retirement - nearly double what current retirees spend. Expectations are rising fast, but are they realistic or just another case of lifestyle inflation?

Welcome to Firstlinks Edition 627 with weekend update

This week, I got the news that my mother has dementia. It came shortly after my father received the same diagnosis. This is a meditation on getting old and my regrets in not getting my parents’ affairs in order sooner.

  • 4 September 2025

Latest Updates

Shares

Why the ASX may be more expensive than the US market

On every valuation metric, the US appears significantly more expensive than Australia. However, American companies are also much more profitable than ours, which means the ASX may be more overvalued than most think.

Economy

No one holds the government to account on spending

Government spending is out of control and there's little sign that Labor will curb it. We need enforceable rules on spending and an empowered budget office to ensure governments act responsibly with taxpayers money.

Retirement

Why a traditional retirement may be pushed back 25 years

The idea of stopping work during your sixties is a man-made concept from another age. In a world where many jobs are knowledge based and can be done from anywhere, it may no longer make much sense at all.

Shares

The quiet winners of AI competition

The tech giants are in a money-throwing contest to secure AI supremacy and may fall short of high investor expectations. The companies supplying this arms race could offer a more attractive way to play AI adoption.

Preparing for aged care

Whether for yourself or a family member, it’s never too early to start thinking about aged care. This looks at the best ways to plan ahead, as well as the changes coming to aged care from November 1 this year.

Infrastructure

Renewable energy investment: gloom or boom?

ESG investing has fallen out of favour with many investors, and Trump's anti-green policies haven't helped. Yet, renewables investment is still surging, which could prove a boon for infrastructure companies.

Investing

The enduring wisdom of John Bogle in five quotes

From buying the whole market to controlling emotions, John Bogle’s legendary advice reminds investors that patience, discipline, and low costs are the keys to investment success in any market environment.

Sponsors

Alliances

© 2025 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.