Banking Review

Peer-to-peer lending treading water in Australia?

Peer-to-peer lender Lending Hub launched this week, joining existing Australian players iGrin and Fosik.

Led by former investment banker Ivan Mantelli, Lending Hub has been in development since 2007, at the height of the gold rush towards peer-to-peer lending start-ups.

The financial world has changed significantly since then. Investment capital is difficult to come by, the spread between deposit and lending rates has tightened, and we’ve seen a flight to so-called quality that smacks in the face of those trying to compete with the major banks.

One casualty of the credit crunch is peer-to-peer start-up Peermint. Founder Scott Rigby says the group simply couldn’t raise the capital required to invest in licensing and marketing, two critical requirements for success.

“We came very close but in the end the legal hoops are tough to jump through and it was going to cost a significant amount of money.”

With new consumer credit legislation in development and consumers still jittery about where to invest their money, is the peer to peer lending model dead in the water in Australia?

Lending Hub does not appear to be licensed, so could face the spotlight of regulators as it grows.

In the US, peer to peer lending giant Prosper remains voluntarily suspended as it awaits regulatory approval from the SEC. In the UK things are looking a little rosier, with Zopa reporting strong growth in interest from investors who are now more wary of the major banks. Despite the closure of its US business, Zopa says it now has more than £2 million on offer to borrowers in the UK.

Microfinance leader Kiva has also been kicking goals, having to turn some donors away last year after every entrepreneur seeking funds through Kiva was funded. This month Kiva began offering loans to US entrepreneurs, partnering with not-for-profit group ACCION USA for loans of up to US$10,000.

Peer-to-peer lending makes sense for small business start-ups which can find it difficult to gain approval from banks. Entrepreneurs often turn to friends and family for funds, so why not widen the pool with a peer-to-peer platform? Virgin Group founder Richard Branson acknowledged this when he launched Virgin Money USA’s social lending offering last year.

Virgin claims to have facilitated more than US$370 million in loans between relatives and friends, taking care of the credit reporting, loan documentation, and regular statements.

It’s this type of model that I suspect is most likely to gain support in Australia. Fosik already offer a similar service. The question is, will an Australian financial institution seek to participate?