New Zealand peer-to-peer lending – “What is it all about and why should I care?”
This is a pretty fair question given it is still early days in the industry, but with four players now in the market and over $200 million of lending facilitated to date, the peer-to-peer lending landscape in New Zealand is poised for growth and with that a heightened level of media attention. So what is it all about and why should you be aware of it?
Peer-to-peer lending involves matching investors with borrowers via online platforms designed to improve transparency and efficiency and, ultimately, to reduce the operating costs associated with traditional banking models. Investors benefit from earning a higher interest rate than prevailing bank deposit rates and gain exposure to an alternative asset class that adds diversification to their investment portfolio. Borrowers benefit from lower personal loan interest rates and a fast, simple online application process.
Peer-to-peer lending, while in its infancy in New Zealand, has already been hugely successful overseas since first launching in the UK in 2005. UK peer-to-peer lenders have since facilitated over £4.4 billion of lending with key industry players being the likes of Zopa, RateSetter and Funding Circle. The US market has experienced similar growth since launching in 2006 with key players Lending Club and Prosper having originated over US$15 billion and US$5 billion of loans respectively.
Harmoney was the first peer-to-peer lender to launch in New Zealand back in September 2014 and has since facilitated over $200 million of loans through its platform. Harmoney was joined by new entrants Squirrel Money in November 2015 and LendMe and Lending Crowd during December 2015. Squirrel Money has adopted a reserve fund approach to protect investors and has chosen to not use institutional funding. LendMe is focused on first mortgage and business lending up to $2 milllion and Lending Crowd is targeting secured personal loans mostly for the purchase of motor vehicles.
There are two quite different peer-to-peer lending models provided in New Zealand – those that mitigate risks for investors by loan fractioning and those that utilise a reserve fund. Squirrel Money is currently the only operator to adopt a reserve model whereby investor principal and interest repayments are protected by a reserve fund, funded by a percentage of borrower repayments, and held in a trust on behalf of investors to offset future credit losses.
This differs from other peer-to-peer lending operators in New Zealand where investors are exposed to the underlying credit risk of the loan in which they have invested. The risk is managed by the investor diversifying its investment across a large number of loans. This is done by investing in small proportions of loans called fractions. Investing in loan fractions means that investors have to invest in a large number of loans to reduce their credit risk exposure, with the goal of earning a sufficient net return across their portfolio which compensates for the level of credit risk.
The peer-to-peer lending market offers attractive returns to investors, especially given current low interest rates where bank cash deposit rates have dropped below 3.0% p.a. and savings accounts are paying less than 1.50%. Early investors in the Squirrel Money platform have locked in interest rates of between 8 to 9% p.a. for the next two to five years. Harmoney reports an average realised annual return of 12.86% p.a. across all investors, while LendMe and Lending Crowd report gross investor rates on offer between 5.74% to 13.09% and 7.9% to 18.74% respectively (prior to the deduction of service fees and credit losses).
The New Zealand peer-to-peer market is poised for strong growth with the four current operators providing differing propositions to potential investors. Sure, there is a greater level of risk involved as opposed to simply depositing cash in the bank, however, each operator has measures in place to reduce the risk for investors. Peer-to-peer lending is very much the “new kid on the block” and naturally will be treated with early caution, but in the context of the returns on offer, it certainly warrants some attention and I think should be considered in every investor’s portfolio.
John Bolton is the Managing Director of Squirrel Money. He and Jeremy Muir (Partner, Minter Ellison Rudd Watts) are presenting a webinar in ADLS’s popular Commercial Law Series on Thursday 7 April 2016, from 12.00pm-1.00pm, entitled “Understanding Peer-to-Peer Lending: Information & Insights”.