The peer-to-peer investments outshining term deposit rates

RateSetter, one of the few Australian peer-to-peer (P2P) lenders enabling retail investors to participate in the lucrative consumer and business credit marketplace, is not letting a lack of competition stop it from introducing new initiatives.

Investors in P2P loans enjoy superior returns - think 5% to 8% - compared with bank accounts, including term deposits.

But this comes with increased risks, as investors in P2P loans do not enjoy the federal government guarantee over deposits up to $250,000 that covers banks, building societies and credit unions.

RateSetter has expanded into clean energy loans, changed the rules for early withdrawals and is improving its educational offering for investors. It also plans to launch an app by the end of the year.

Investors can start with as little as $10, and at the time of writing, interest rates ranged from 3.8% for one month to 7.8% for five years.

SocietyOne, the first P2P lender to set up shop in Australia, has still not changed its business model to enable retail investors to participate.

Only institutions and high-net-worth individuals and self-managed super funds (with over $2.5 million in net assets or at least $250,000 in gross earnings a year over a minimum of two years) can invest via the lender.

A spokesperson says potential retail investors can register their interest online at societyone.com.au but there's no estimate of when they might be able to invest.

ASX-listed Wisr is another P2P lender that accepts retail investors, although Andrew Goodwin, chief financial officer, describes it as a "neo-lender" rather than a marketplace lender.

He says it has an ecosystem model, offering genuine benefit to its customers and promoting financial wellness, for example, by showing people their credit scores and providing tools to enable them to pay off debt sooner.

TruePillars, which boasts an average annual return of 12.35%, offers retail investors the opportunity to fund business loans with as little as $100.

You need to register to invest and set up your investment instructions, and the platform will invest your funds in loans that match your criteria. As the borrower makes their monthly loan repayments, you will receive distributions equivalent to your share of the loan.

La Trobe Financial, which is a long-established and well-performing mortgage lender, also labels products as P2P investments.

Its Select Investment Account (P2P) enables investors with a minimum of $1000 to select loans they want to participate in. All loans are secured by first mortgages over Australian property. Returns, which are from 6% a year, are paid monthly.

Focus on peer-to-peer retail investors

Former P2P lender MoneyPlace, which was taken over by Liberty about 18 months ago, no longer seeks retail investors.

"I'm very surprised there's not more competition [in the category]," says Daniel Foggo, CEO of RateSetter, which set up shop in 2014.

It would be good to have more participants to make P2P a bigger investment class, he says. But, on the other hand, the lack of competitors really helps RateSetter capture the types of high-quality borrowers it is trying to attract.

A major reason for the lack of companies in the space, compared with the situation in other countries, is the high barrier to entry.

"It took us a lot of time and cost us a lot of money to meet the requirements of the regulatory regime," says Foggo.

But this does give investors in the relatively new sector a degree of comfort. For borrowers, including businesses, there are more options including Harmoney, Marketlend, ThinCats and Bigstone.

RateSetter is firmly focused on retail investors, says Foggo. The company has 15,000 registered lenders, both young and old, and the average investment is $20,000 by individuals and $100,000 by self-managed super funds.

By the time this article is published, Foggo expects the lender will have passed a milestone, with half a billion dollars in lending, meaning the business is coming to scale after a period of deliberate growth.

"We're now lending $20 million to $25 million a month compared with $50 million to $90 million by the major banks."

RateSetter is not sitting on its hands either.

Following the successful launch of its green loan marketplace in May 2017 with $20 million, the P2P lender has recently attracted an extra $100 million in support from the federal government's Clean Energy Finance Corporation.

As a result, it's now the largest funder of consumer loans for the purchase of renewable energy equipment, such as solar panels and home batteries.

"What is maybe most surprising is that our renewable energy lending markets have attracted a lot of retail and SMSF investor interest," says Foggo.

"Investors are clearly attracted by the positive impact they can have on the environment by supporting the uptake of renewable energy, but also by the strong credit characteristics [of the borrowers] - homeowners improving their monthly finances by reducing energy bills."

To date, RateSetter has funded $25 million of these loans at an average rate of 6.9% and it's growing at 10% a month, says Foggo.

Returns available to investors in these options at the time of writing were 5% for investments in South Australian renewable energy and 6.4% for those in national clean energy.

Apart from the clean energy products, RateSetter's main point of difference is its provision fund, which lowers the risk of any defaults impacting investors.

The money in this fund comes from charges paid by borrowers, and RateSetter is able to direct the provision fund trustee to compensate a lender in the event of a borrower's late payment or default. This fund now sits at $13 million, equating to 6.2% of the loan book, says Foggo.

RateSetter has also introduced a sell-out feature, partly aimed at younger investors saving for a home deposit.

It means that if you're in the three- or five-year lending markets and your life circumstances change you can request an early exit, paying an exit fee of 2%, says Foggo.

The online lender's next move is to improve the customer experience, launching an app by year-end and improving education through online tutorials and calculators.

This should help make the process of reinvesting early repayments easier for investors.

Wisr's retail product is deliberately much less hands-on. It says its Personal Loan Fund, which requires a minimum investment of $10,000, has paid a 7.67%pa return (net of fees) since inception in May 2015.

Diversifying investments

Your investment is diversified across all loans held in the fund, meaning the impact of any individual borrower not paying is greatly reduced. You aren't required to select loans or manage monthly reinvestment.

And you can choose to either receive your distributions monthly or reinvest them. To date the fund has made about $100 million in loans, says Goodwin, but only about 5% to 10% have been funded by retail investors, with the vast majority from wholesale investors.

TruePillars' platform provides investors with the opportunity to vet each loan opportunity and make their own decisions. Starting with as little as $100, investors can bid in the TruePillars marketplace for a new loan or invest in an existing one.

Prospective investors can view the details of each individual investment online, including the borrower rate, the time frame, the estimated default rate and investor bidding. Keep in mind that if you invest you will receive the borrower rate less the 2% that TruePillars retains on each loan.

Investors who don't want to be so hands-on can instruct the company to invest on their behalf based on a set of fixed parameters. Investors with loan units are scheduled to receive payments on a monthly basis.

But as your payments depend on the business borrower making repayments as they fall due, the actual timing of payments will depend on when the business does so.

Investors who want to liquidate their loan units early can list these investments, which will be available to other investors in the TruePillars marketplace. If they're purchased, the incoming investor replaces you, and your loan units will be converted to cash units, less a 0.5% conversion fee.

Disclosure: Pam Walkley invests through RateSetter.

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