SocietyOne: Consumer lending profitable for banks

Peer to Peer (P2P) lending and investing is rapidly expanding in Australia, with digital disruptors tipped to take billions off the banks. We caught up with Matt Symons, co-founder and CEO of SocietyOne for some further insights.

Q: Why can P2P provide a better solution to the borrower?

A: P2P lending is a simple, fast and efficient way to connect people with good credit who want a loan with investors looking for attractive returns. Everything happens in a secure, online marketplace where personal identity is protected.

With SocietyOne, creditworthy borrowers can apply for an unsecured personal loan between $5,000 and $35,000, for a term of 12 to 60 months, at low, fixed rates. A personal loan can be used for anything from financing a wedding to doing a home reno. 68 per cent of our clients, for example, use SocietyOne loans to consolidate more expensive debt, typically credit cards. (An unsecured loan means that there is no security needed from the borrower – versus a secured loan that is protected by an asset or collateral of some sort).

As a P2P lender, SocietyOne pioneered risk-based pricing in Australia three years ago. Historically, there′s been a one-size-fits-all approach to pricing in the market, which has traditionally been the case of unsecured consumer debt. We think that′s inherently unfair for a large group of borrowers who have excellent credit. These creditworthy borrowers should pay a lower rate that reflects their lower default risk.

This is an essential part of our proposition in the market.

 

Q: Why can P2P lending provide a better solution for investors?

A: Consumer lending is a category that has been traditionally controlled by the banks and has been amongst the most profitable parts of their retail lending operations. With P2P lending, investors now have the opportunity to capture some of the margins that banks have traditionally kept for themselves.

For the first time, our technology platform offers investors the opportunity to build a true multi-asset class portfolio (unsecured personal loans and secured SME loans) with the ability to diversify across multiple fixed-income investment products using a P2P lending model. Investors get exposure to a diversified asset class with attractive returns they didn′t previously have access to.

This technology has many unique attributes that set it apart from any other marketplace lending systems, like the ability to incorporate an amortisation schedule for every loan. In this way, every investor has a unique P&I stream associated with each investment. It enables individual loans to be fractionalised into many pieces, allowing for greater investor diversification.

So for investors, our value proposition is:

  • Diversification across and within multiple asset classes (secured and unsecured) where you can build your own portfolio according to your investment horizons.
  • Unique access to high quality assets:

(1)   A consumer finance asset class that is the most profitable in a bank′s portfolio with returns that are not strongly correlated to RBA cash rates and the share market.

(2)   A niche SME secured asset class with attractive rates of return.

  • Predictable, fixed monthly cash flow in the form of principal and interest repayments that can be reinvested or withdrawn.

 

Q: Does P2P lending provide access to people who otherwise could not get a loan?

A: SocietyOne works with creditworthy, quality borrowers who typically have established relationships with major banks. Our first priority is to prove that quality borrowers (people with good credit history) are not getting the rate they deserve – and that essentially for people with excellent track records, the existing pricing model is the most inequitable.

We currently don′t have a product for a subprime category of borrowers.

Q: Can borrowers expect better priced loans than through traditional lenders?

A: P2P lending is an opportunity for borrowers and investors to bypass the banks and connect directly with each other in a secure environment where their identity is protected. Enabled by a secure online technology platform, the entire process can be done faster, cheaper and in a paperless environment.

Borrowers with good credit history can expect lower rates than those typically offered by traditional banks. Our business model is based on the power of risk-based pricing, in other words, rewarding good quality borrowers with lower, more personalised rates based on their unique credit history.

For borrowers, our value proposition is:

  • Risk-based pricing that rewards a good credit history with a lower rate.
  • A competitive environment where investors actively bid for loans, ensuring borrowers get the lowest possible rate.
  • Flexible loan terms and fixed rates

On average, SocietyOne borrowers with good to excellent credit could expect personal loan rates that are several percentage points lower than the major banks.

 

Q: How do you manage the investment risk for investors?

A: The returns from marketplacne lending platforms will depend on the performance of the underlying loans. While this is an investment that may not appeal to all investors, we minimise risk in the following ways:

  • By only approving loans to creditworthy borrowers who meet our credit criteria.
  • By ensuring investors have a fully diversified investment portfolio. SocietyOne offers investors access to different asset classes and a level of diversification across both secured and unsecured loans.
  • By introducing a bankruptcy remote trust structure for the protection of investors and where the scheme can continue to operate through an appointed custodian.

Q: What return premium should investors expect to receive to compensate for the increased risk?

A: SocietyOne′s goal is to originate high quality loans and build a quality portfolio of assets that can deliver strong and consistent returns to our investors.

Returns will generally differ for different investors, but if you had invested in all loans written on our platform across livestock and personal loans since we launched in Aug 2012, you would have an annualised return of approximately 10% after management fees and after any loan losses. Note: past performance does not predict future returns. 

Q: What is the approval process for a loan? How long does it take?  Is it faster than traditional lenders?

A: SocietyOne pioneered risk-based pricing in Australia with P2P loans. Applicants can get an indicative, personalised rate quote online in 2 minutes, with no impact on their credit file. So a prospective borrower knows immediately if they qualify for a loan and at what rate. We call this “Price Discovery”, because it lets borrowers shop around for the best deal.

To make this process even more powerful, SocietyOne partnered with Veda to launch GetCreditScore.com.au where Australians can retrieve their credit score, online, for free. With this information, a P2P lender like SocietyOne would be able to give a borrower an indicative rate quote on a loan, based on their credit score in addition to other factors, instantly.

If a borrower is interested in the indicative rate, they can complete a 10-minute online application. SocietyOne assesses loan applications by analysing a number of credit inputs in addition to credit score, including transactional bank statements, to determine an applicant′s creditworthiness, capacity and ability to service the requested loan amount. This data helps guide our final underwriting decision and pricing.

Those applications that meet our credit criteria – and if the terms are approved by the borrower – are listed on the platform for funding, with all Personal Identifiable Information removed to ensure privacy and confidentiality. Registered investors then competitively bid to underwrite a fraction of each loan. In other words, every loan is broken up into small pieces and split amongst the investors who offer the best rates.

This unique reverse auction dynamic provides borrowers with the best possible rate based on their credit ranking. It′s like a virtual marketplace where investors compete to offer the best rate for each loan.

This experience of having many different investors bidding to underwrite loans is one of the more empowering and personally validating aspects of SocietyOne′s unique marketplace lending process.

 

Q: With positive credit reporting yet to become fully operational, how do you risk assess and risk rate borrowers?

A: We pioneered risk-based pricing in Australia, and just recently launched our GetCreditScore.com.au service in partnership with Veda.  We see this as a revolution in empowering borrowers before they apply for credit.  This functionality is now available as part of our online application process, so borrowers can get an immediate, personalised rate quote based on their credit.

Our philosophy is to reward better borrowers with a better rate, through an information exchange that combines traditional and next generation credit criteria. So, in addition to the more traditional credit attributes like credit score – we look at a range of other available attributes like cash flow, tenure in residential address, and other transactional information.

As part of this assessment process, the platform′s credit module performs a series of automated functions by loan product, including scorecard attribution, serviceability calculations and decision tree modeling through complex test sequencing. Data is systematically evaluated to determine the appropriate application outcomes.

This information will ultimately drive our underwriting decision and determine the SocietyOne credit ranking and price band for each individual loan.

Q: What risk profile of investor is suited to P2P lending?

A: We should make it clear to any investor considering investing in P2P lending that it has a different risk proposition to investing in a traditional fixed income product or bank term deposit and may not be suitable for all investors.

SocietyOne has been the pioneer of marketplace lending in Australia, and we made a strategic decision to prove the viability of the model by first working with wholesale clients and sophisticated investors. Given our 3-year track-record, we are now making progress in working with retail investors very soon.

That said, we have different investors with different risk/return appetites. Through our Wholesale Managed Investment Scheme, we can serve fixed income investors such as wholesale clients, family offices and other qualified, sophisticated investors looking for attractive yields, as long as they qualify as ′Wholesale Clients′ as defined by Sections 761G and 761GA of the Corporations Act 2001.

Readers can find out more about SocietyOne here.

 

 

 

 

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