Analysis: the new wave of personal lending

A flurry of personal lending news over the past few weeks begs for a closer look at where these small loans sit in the big scheme of things.

Diversification is nothing new for mortgage brokers. Ask any broker how they’ve diversified their business and most will tell you that they offer insurances, commercial loans and perhaps even a few wealth offerings through their referral networks.

But what about personal loans? Where do they come into the conversation?

Let’s review some of the activity in the personal lending space over the last couple of weeks.

DirectMoney

Late last month, ASX-listed marketplace lender DirectMoney announced strategic partnerships with Loan Market and Finsure.

Former Aussie Home Loans chief executive Stephen Porges is executive chairman of the marketplace lender. Given his background, the new third-party partnerships make perfect sense for a company looking to build scale.

Mr Porges admits that it has never been easy for brokers to diversify into the personal lending space. However, he’s confident that a simple approach could see mutually beneficial partnerships between DirectMoney and Australian mortgage brokers.

“I think we have a unique insight to the industry, and we’ve developed our model specifically for it,” Mr Porges said.

“A personal loan generally lasts for only three or four years, so it can be used by brokers as an effective client retention tool for home loan customers,” he said, adding that the opportunity for brokers to grow their business through personal lending is “very significant”.

The new partnerships give Loan Market and Finsure access to its technology-based lending platforms and a dedicated team to assist them and their brokers further service their customers.

Mr Porges said there will be a unique portal for brokers who use the DirectMoney platform – which is “ridiculously easy” to use.

“Once we become more developed with groups, we’ll develop specific platforms for each,” he said.

“Eventually the data will be pre-populated, so brokers won’t have to re-enter the information, and we’ll be able to approve the personal loan at the same time or pretty close to when the broker is doing the mortgage.”

Brokers who use the DirectMoney platform are paid a flat fee irrespective of the size or length of the loan.

RateSetter

Peer-to-peer lender RateSetter recently made headlines by becoming the first lender of its kind in the country to compete directly with the banks by offering secured personal loans.

Loans with RateSetter can now be secured against personal property such as a car and those borrowers who are able to offer an asset as security will be rewarded with more affordable repayments.

RateSetter CEO Daniel Foggo says personal loans are an obvious growth strategy for brokers.

“Once a broker realises they can actually generate very good income with little effort, they tend to listen much more intently,” Mr Foggo told Mortgage Business.

“Also, as word spreads that the processes we provide for the broker and their customer [are] really slick and easy, it becomes a virtuous circle.”

Brokers are already starting to show an interest; the third-party channel is now referring a significant proportion of RateSetter’s loans.

Mr Foggo said broker interest has jumped in recent weeks since one of the lender’s team went on the road with PLAN Australia talking to brokers about peer-to-peer lending.

Yellow Brick Road

If mortgage broking pioneer Mark Bouris announces plans to enter the personal lending space, it’s probably worth looking at.

When YBR provided a strategy update to the ASX last month, plans for a securitisation program dominated the headlines. However, a closer look at the group’s announcement revealed its plans to pursue personal lending.

YBR said that “personal lending is an ideal entrée” as it looks to pursue new opportunities in these changing times.

But as Mr Bouris remarked in a group trading update this week, it is YBR’s entry into the securitisation market that will ultimately drive new products.

“Thanks to our acquisitions of Vow Financial and Resi Mortgage Corporation, combined with the growth of the Yellow Brick Road branch network, we now have the size, scale and capability to establish a securitisation program,” he said.

“Such a program gives us free rein to move rates, enhances our product funding options and improves margins significantly.

“Furthermore, it will provide the capability for us to develop new offers to take to market, including personal lending.”

YBR has also made clear its plans to push into the SME lending space. In fact, all lenders, including the majors, are eager to push commercial finance through the broker channel.

From a lender’s point of view, the more products a broker can sell to their clients the higher the chance the client will move across to that lender for their everyday banking. In other words, their pay goes into an account with that bank.

When banks talk about their 'share of wallet' this is essentially what they mean – how much of a customer’s financial needs are being serviced by the one institution. Multiple touch points. Multiple products.

As NAB Broker general manager Steve Kane said earlier this year: “It is in a bank’s own best interest to have more products with every customer; the strategy simply builds the profitability of the channel. Most importantly, banks need to do this in partnership with brokers.”

‘Wallet share’ for the banks can easily be translated into ‘diversification’ for brokers.

Fintech

With personal lending, technology is fast creating a world of personalised interest rates. One can easily see how such a thing would work in a broker-client discussion, particularly when brokers already have reams of data on file to facilitate the process.

The use of algorithms to personalise loan structures could reshape the Australian personal lending market, according to PricewaterhouseCoopers.

Katherine Maree Pace, venture lead at PricewaterhouseCoopers, said credit-rating algorithms leverage personal data and behavioural economics to deliver a more sophisticated segmentation of a traditionally 'blanketed' middle market.

“This is a fantastic plus for Australians seeking personal loans as algorithm intelligence moves us towards a future of personalised interest rates, specific to a person’s unique profile.”

Brokers are at the coalface. The third-party channel is now the preferred channel for prospective borrowers. When it comes to identifying the unique profile of a client, who better than a broker?

In a rapidly changing mortgage market, where banks are keen to get brokers looking at alternative revenues streams, personal loans seem to be getting plenty of attention.

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