by Nick Raphaely

Westpac’s investment in peer-to-peer lender SocietyOne, via its $50 million VC fund Reinventure Group, is a clear sign that disruptive new finance models are finally being taken seriously by incumbents.

Over in South Africa, Barclays Africa has also just acquired a 49% stake in P2P lending platform RainFin.

The banks are being forced to sit up and take notice of alternative lending. It’s a tough call for banks because they don’t want to cannibalise their own business. But if they’re not in the space, someone else will be.

Race to the swift

These days the race is to the swift, not to the large.

Westpac is so far the only Australian bank that has invested in a disruptive lending model. But when we look at how the market is evolving, it perhaps shouldn’t come as such as a surprise.

Businesses and individuals have always needed to borrow. As with anything a roadblock only encourages innovation. Since the global financial crisis, access to conventional funding has remained tight. This restrictive climate, along with renewed economic and business growth, is compelling the discovery and adoption of new types of lending. 

Post-GFC we’ve seen developments in all the following:

Peer-to-peer lending: as with Society One, also called social lending. Investors are matched with the capital-constrained. The investor is in fact the lender and so the intermediary and carries no risk

Crowdsourced funding: leading players include Kickstarter, Indiegogo and Pozible, where individuals pledge money towards a project they want to see funded. Kickstarter alone claims to have received over $1 billion in pledges

Debtor finance/factoring: where companies raise funds on their invoices to keep the cash flowing

Microfinance: not just aimed at developing countries, but also targeting marginalised communities in OECD countries including the US and Canada

Asset-based lending: as a disclaimer we’re in this space, but the big global gun is UK start up borro, which has ridden the post-GFC funding crisis to reach a loanbook of $100 million and expand into the US

What these models have in common is that they’re helping people who can’t talk to the banks to get money. If you can’t satisfy a conventional bank’s lending criteria, you no longer have to give up on your plans. Instead, you can find lenders through the "disruptive" marketplace.
 
Alternative lending outlook

A while back, in 2008 at the height of the GFC, Gartner predicted that social lending would account for 10% of all lending by 2010. That may have been over-ambitious, but Accenture is now predicting that full service banks could lose around 35% of their market share by 2020 and up to 25% of US banks could disappear completely.

Technology, mobile and social are major disruptors when it comes to the finance sector. Also giving start ups a boost is new Australian legislation that allows loan underwriters to access more credit data. In the US, where this has been available for a while, the alternative lending sector is far more developed.

It will be interesting to see if any other major Australian banks take Westpac’s lead and dip their own toes in the waters of alternative lending.

www.assetline.com.au