Peer-to-peer lending white-ants the banks

BECAUSE Australia’s banks increasingly refuse to handle loans to small-to-medium enterprises (SMEs) – and seem incapable of accurately pricing business risk – so-called peer-to-peer lenders are set to take the lion’s share of this $240 billion annual market.

That is the early experience and opinion of new online marketplace invoice lender FundX founder and CEO, David Jackson.

He said it has led to a $240 billion yearly opportunity for investors to enter the SME debt market via peer-to-peer and marketplace mechanisms. Mr Jackson also said this opportunity is likely to increase as banks tighten their lending amid global stock market volatility and pressure from the Australian Prudential Regulatory Authority (APRA), “opening the door for peer-to-peer and marketplace lenders with more sophisticated credit assessment technology to rapidly scoop up market share”. 

“Assessing and pricing risk in the SME debt market can be highly challenging as business owners often struggle to demonstrate evidence of cash flow, credit history, or financial status and behavior,” Mr Jackson said.

“For this reason, banks often take a far more conservative approach than is necessary, or price their loans substantially higher than they do for larger enterprises – despite SMEs being far less able to absorb this expense into their budgets.

“Credit decisioning tech-platforms that leverage data counting packages, big data and machine learning, on the other hand, are able to overcome these challenges by assessing non-traditional data en-masse, including hundreds of online and social media data points.

“The outcome is forward-looking risk-adjusted pricing based on current, not past, performance, negating the need to provide mountains of paperwork or demonstrate a lengthy credit history.”

Reserve Bank data showed about 25,000 SME loans valued at around $20 billion were being rejected needlessly each month in Australia, adding up to $240 billion dollars over the course of each year, Mr Jackson said.

A research report by Macquarie Bank into the threat posed to banks by fintech stated “digital disruption is the number one issue facing the (banking) industry today” and “the longer-term threat remains lending disintermediation”.

The report also noted a number of occasions where banks had attempted to upgrade their technological capacities in order to keep up, but that they were “running materially over time/budget”.

Ex-Commonwealth Bank and Royal Bank of Scotland employee-turned-fintech founder, John Pellew of financial data analytics firm, Othera, said the issue was structural within the banking system and so was unlikely to be resolved quickly.

“The business models of banks are simply not designed to adequately support unsecured or small business lending, and their technological capabilities are significantly behind those of alternate lenders who are able to move much more rapidly and personalise loans more accurately to individual applicants,” Mr Pellew said.

Australia’s two million SMEs employ about 70 percent of the workforce and account for over half of the output of the private sector, rendering their health vital to the health of the Australian economy, Mr Jackson said.

“By not servicing this all-important market segment, we are strangling the engine room of the Australian economy – small business.”

He said FundX loan rates began at 1.5 percent, compared with traditional invoice factoring companies and the big four banks which have rates of around 4-5 percent when all fees and charges were taken into account.

“A decision on the application can also be made in under a single minute, and funds delivered to approved applicants within 24 hours,” Mr Jackson said.

Since its soft launch just a few months ago, FundX has taken enquiries for more than $4 million and has funded close to $1 million of invoices without a single dollar spent on marketing. It is currently in negotiations for a $10 million facility, and a capital raise from sophisticated investors and a number of financial institutions.

www.fundx.com.au

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