By guest contributor Rosemary Steinfort from, DirectMoney
Consumer finance, which covers mortgages, personal loans and credit cards, has been long been a significant part of banks’ business, growing from 28% of total lending in 1990 to 38% now, according to Australian Bureau of Statistics data. Financial technology (fintech) has been an innovative development with exponential growth around the world. In Australia fintech investment has seen soaring growth with a record high of $626 million last year as reported by KPMG.
Fintech penetration into consumer finance started in the UK in 2005 with Zopa, which now has over 50 per cent of the unsecured lending market, and fintech has since spread around the world.
Fintech, in the form of peer-to-peer (P2P) lending connects investors or lenders with borrowers with the use of technology, bypassing the traditional lenders. The “classic” model involves individual lenders choosing the loans they want to invest in. As a part of the evolving industry, the preferred term is becoming “marketplace lending”, which embraces all forms of online lending platforms involving investors and borrowers. The terms of P2P lending and marketplace lending are essentially synonymous, although the later reflects the growing importance of institutional investors alongside retail investors.
The P2P and marketplace lending industry has seen innovative models such as the pooled fund, which allows investors to passively invest in consumer credit, rather than being actively involved in investing and reinvesting. The pooled model aims to diversify risk across all loans in the portfolio. Investors are not required to select loans or manage monthly reinvestment.
Different P2P and Marketplace Lending models will exist alongside each other, although the blurring of the models is occurring overseas, with platforms offering both models. Either investors are happy to be more active in selecting loans, taking on more risk (or lower quality loans) for higher returns or are content to invest in a fund that offers exposure to consumer credit with borrowers from across the risk spectrum, and a sharing of returns and any losses.