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

Australian house prices close in on world record

Sydney is set to become the world’s most expensive city for housing over the next 12 months, a new report shows. Our other major cities aren’t far behind unless there are major changes to improve housing affordability.

The case for the $3 million super tax

The Government's proposed tax has copped a lot of flack though I think it's a reasonable approach to improve the long-term sustainability of superannuation and the retirement income system. Here’s why.

Tariffs are a smokescreen to Trump's real endgame

Behind market volatility and tariff threats lies a deeper strategy. Trump’s real goal isn’t trade reform but managing America's massive debts, preserving bond market confidence, and preparing for potential QE.

The super tax and the defined benefits scandal

Australia's superannuation inequities date back to poor decisions made by Parliament two decades ago. If super for the wealthy needs resetting, so too does the defined benefits schemes for our public servants.

Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

The super tax has caused an almighty scuffle, but for SMSFs impacted by the proposed tax, a big question remains: what should they do now? Here are ideas for those wanting to withdraw money from their SMSF.

Getting rich vs staying rich

Strategies to get rich versus stay rich are markedly different. Here is a look at the five main ways to get rich, including through work, business, investing and luck, as well as those that preserve wealth.

Latest Updates

SMSF strategies

Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

The super tax has caused an almighty scuffle, but for SMSFs impacted by the proposed tax, a big question remains: what should they do now? Here are ideas for those wanting to withdraw money from their SMSF.

Superannuation

The huge cost of super tax concessions

The current net annual cost of superannuation tax subsidies is around $40 billion, growing to more than $110 billion by 2060. These subsidies have always been bad policy, representing a waste of taxpayers' money.

Planning

How to avoid inheritance fights

Inspired by the papal conclave, this explores how families can avoid post-death drama through honest conversations, better planning, and trial runs - so there are no surprises when it really matters.

Superannuation

Super contribution splitting

Super contribution splitting allows couples to divide before-tax contributions to super between spouses, maximizing savings. It’s not for everyone, but in the right circumstances, it can be a smart strategy worth exploring.

Economy

Trump vs Powell: Who will blink first?

The US economy faces an unprecedented clash in leadership styles, but the President and Fed Chair could both take a lesson from the other. Not least because the fiscal and monetary authorities need to work together.

Gold

Credit cuts, rising risks, and the case for gold

Shares trade at steep valuations despite higher risks of a recession. Amid doubts that a 60/40 portfolio can still provide enough protection through times of market stress, gold's record shines bright.

Investment strategies

Buffett acolyte warns passive investors of mediocre future returns

While Chris Bloomstan doesn't have the track record of his hero, it's impressive nonetheless. And he's recently warned that today has uncanny resemblances to the 1990s tech bubble and US returns are likely to be disappointing.

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.