Our latest news.

Why has private lending has become so popular?

In the last decade we’ve seen massive disruptions to the banking industry, particulalrly the lending industry. This has been largely due to the rise of digital banking and FinTech firms which have made private lenders a viable alternative to the traditional type of lending offered by banks, credit unions and building societies.

The private lending revolution

Private lending goes by various names. It’s sometimes referred to as peer-to-peer lending (P2P lending) or marketplace lending. In essence, it’s the practice of lending funds via online platforms to individuals or companies that need a loan.

Through online platforms, lenders (or investors) are matched with borrowers. Different private lending companies facilitate matching in different ways. But in general, most companies offer different investment options to suit the different risk appetites of their investors.

As private lending companies operate mostly online, overheads are considerably lower than those of conventional banks and institutions. Private lending companies are then able to pass these cost savings onto their customers in the form of lower interest rates for borrowers, and higher returns for investors.

Australia gets on board

Private lending has been going from strength to strength in the UK and the US for well over a decade. It has emerged as a key player in the property market, allowing both borrowers and lenders to sidestep traditional financial intermediaries and gain faster access to the funds they need.

In Australia, the rise of private lending has been slower. Since 2016, the Australian Securities and Investment Commission (ASIC) has been actively encouraging FinTech firms and other lending startups to test their services in a regulatory friendly environment for a limited 12-month period.

ASIC has provided this “regulatory sandbox” because it recognises that fostering innovation in FinTech can lead to real economic benefits for consumers.

Flow on effect of banking royal commission

Another stimulus for private lending has been the findings of the banking royal commission. In their final report, which was handed down in early February 2019, the commission recommended wide-scale changes to the banking industry. Unfortunately, most of the changes won’t happen swiftly enough for borrowers or investors.

Moreover, the misconduct of banks and mortgages brokers documented in the commission’s final report will do nothing to endear borrowers or investors to traditional lenders.

The demise of the traditional mortgage broker?

In the case of mortgage brokers, the royal commission’s report details the ways in which many brokers have been acting on behalf of banks and other financial institutions rather than on behalf of borrowers.

They have been doing this because the banks and other big lenders offer upfront and trailing commissions.

While the commission has recommended abolishing the practice of trail commissions and volume-based bonuses, the Government won’t be introducing bans until 2020.

The report also recommends that home loan customers should pay a fee to mortgage brokers. But whether borrowers have the capacity or desire to pay further fees on property loans, remains to be seen.

In short, private lending is one of the latest digital disruptors in a world where banks and financial institutions have failed to adapt to the needs of the modern consumer, whether borrower or investor.