Savers can cop a raw deal from the big banks, but peer-to-peer lending could allow consumers to rob from the bank’s profits.
While savings accounts — some of the safest of all investments — barely keep pace with inflation, a popular European company is now offering average Australians a way to seize bank profits for themselves.
Comparison website Canstar estimates that anyone on the most common marginal tax rate of 34.5 per cent (including Medicare levy) needs a return of 4.85 per cent before tax to match inflation, which few, if any, savings accounts currently offer.
Last year, the big four banks raked in a combined $27 billion in profits, with some of their best margins made on personal loans.
Mozo.com.au director Kirsty Lamont told The New Daily that peer-to-peer lending could turn the tables on the banks and put pressure on them to raise rates.
“Savers have had a bad run in light of the low interest rate environment we’re in, but that could change if we see more competition brought on from the likes of peer-to-peer lenders,” she said.
With the introduction of RateSetter earlier this month to Australia, there are now two ways to access this lucrative market— one for average Aussies, the other through SocietyOne for the wealthy.
The everyday option
RateSetter works somewhat like a stock exchange, matching your loan offer with those keen to borrow.
RateSetter CEO Daniel Foggo, a former investment banker at Rothschild and Barclays Capital, told The New Daily that his company offers “a compelling alternative for the savings of everyday Australians”.
“By using advanced technology and cutting out the traditional middlemen between savers and borrowers, we can pass on the benefits to savers in the form of better rates,” Mr Foggo said.
You can invest as little as $10, from one month up to five years, at the market rate, or ask for a higher rate. Rates constantly move up and down, but generally hover in the vicinity of five per cent for a one-month loan, seven per cent for one year, eight per cent for three years and 10 per cent for five years.
“We absolutely think that Australia is ripe for disruption, as for too long savers have got a pretty raw deal,” Mr Foggo said.
The premium option
SocietyOne, backed by venture capital fund Reinventure, in which Westpac has a stake, is aimed instead at “sophisticated” investors. It only accepts money from those who earn at least $250,000 a year or who have net assets of least $2.5 million. These larger-scale investments are then pooled, spreading the risk, rather than matching individual lenders to individual borrowers.
SocietyOne CEO and co-founder Matt Symons told The New Daily that “investing in Peer-to-Peer lending is not an asset class that will be right for all investors”, but can still be a way to access the “big profit pools” of the banks.
“[The big banks] have traditionally captured the big spreads in the middle between high lending interest rates and low deposit rates. It’s an asset class that’s not previously been available to investors,” Mr Symons said.
SocietyOne says its returns are approximately 12 per cent per year, or approximately 10 per cent once defaults are factored in.
Beware the risks
Both companies only lend to premium borrowers — those with strong credit ratings — but the risk of non-payment remains.
SocietyOne says its default rates are on par with the big bank average of two to three per cent per year, while RateSetter in the UK has a default rate under one per cent.
When a borrower takes out a loan from RateSetter, they pay a fee depending on their credit rating into a Provision Fund to protect against defaults. At the time of publication, the fund contained $205,000 to cover $146,000 in loans (although RateSetter does not guarantee the fund will cover you).
SocietyOne lowers risk by spreading loans across multiple borrowers.
“Investments are capped with a maximum percentage exposure in any one loan so investors can build a diversified portfolio comprising of small percentage interests in many different loans,” Mr Symons said.
Peer-to-peer loans are not backed by the Australian Government Deposit Guarantee Scheme, so there is no government protection if the companies fail.
Peace of mind
Given the risks, you might prefer the safety of a government-backed savings account. Here are some of the base rates on offer:
• UBank 2.96 per cent
• Citibank 2.90 per cent
• Bank of Melbourne 2.85 per cent
• Bank SA 2.85 per cent
• St George 2.85 per cent
• ING Direct 2.75 per cent
• CUA 2.75 per cent
• ME Bank 2.75 per cent
Rates closer to four per cent can be found if you meet special conditions, such as withdrawal delays and regular deposits.