Q: Australia is the first international expansion for RateSetter. What makes this the right time to enter the Australian market?
A: I first met the RateSetter team in London in mid-2012, at which time we started working on our launch into Australia, so in terms of fast moving technology companies, you might say that we?ve considered Australia attractive for some time.
Most notably we observed the concentration of loans markets in Australia, and the resulting lack of innovation and competition, particularly in the personal loan markets.
There are a number of similarities between the Australian and the United Kingdom loan markets, so it was quite easy to gain confidence that peer-to-peer lending and RateSetter?s business model in particular would quickly gain traction in Australia and prosper.
Q: You have a number of different lending terms, which much be attractive to investors. What is the most popular lending term, here and in the UK?
A: We find that investors are particularly interested in our 1 Month lending market and our 5 Year Income lending market. This is not unexpected. The 1 Month lending market really provides something unique not just for the peer-to-peer lending industry globally, but also in terms of a short term investment with a reasonable return and risks that can be well understood. The 5 Year Income lending market on the other hand provides a higher interest rate to help support those investing for the longer term, including those investing though a SMSF.
An important feature of our business model is that the amount of funds that can be invested in each of these lending markets is really dependent on the volume of loan applications we receive from creditworthy borrowers and the terms of those loans.
Interestingly, what allows the supply of funds from investors to reach an equilibrium with the demand for loans from creditworthy borrowers is the real-time movement of interest rates for each of our lending markets. In other words, we don?t set the interest rates, rather they are an outcome of the supply of funds from our lenders, and the demand for funds from borrowers.
Q: What attracted you personally to this industry?
A: I had worked in financial institutions for well over a decade, and I could see that the whole structure of loan markets was flawed, and that borrowers in particular were getting a raw deal. After the GFC it was clear that savers, whether they were companies or individuals, were getting terrible returns on their cash, yet they were paying exorbitant rates on loans, and the fees were becoming disproportionate to the effort put in by the lender. I knew there had to be a better way to lend and borrow, and that technology had to play an important role is redefining finance. The challenge was really just to find the right business model.
I consequently resigned from my employment at Barclays Capital in Sydney to travel to Europe to find a business model that I thought could help solve these problems for Australians. Over a number of months I approach a raft of innovative European finance companies, including a number of peer-to-peer lenders. The day I met the founders of RateSetter, I knew I had found the answer.
Q: Finally, P2P lending would seem to be a prime example of digital disruption. What makes personal lending a good target for disruption?
A: Personal loan markets are particularly attractive for peer-to-peer lending due to the spread between the saving and borrowing rates of traditional financial institutions. In an Australian context, a term investment with a bank might earn a return of say 3% yet the borrowing rate is typically up at around 16%. The spread of about 13% is massive. There is an opportunity for peer-to-peer lending to deliver a better deal for both the saver and the borrower by reducing the spread to well below 5% whilst also helping to protect a lender from the risk of any borrower default, which RateSetter does through its unique Provision Fund. Importantly, we can also do this with a level of transparency that the financial system has never experienced before.