Lessons from a Bank-Free Investment: Peer to Peer Lending, Risks, and Returns

By Nicholas Read and Anthony Mahler

Bonus time is approaching for many executives. So what’s the best way to put that money to work for you? The options are myriad, but the rise of peer to peer lending presents an interesting new alternative. After 20 years investing in properties and learning how to use predictive software algorithms to place measured bets on the share market, Australian medical entrepreneur and armchair investor Anthony Mahler started investing in P2P lending platforms in 2016. This is what he learned after the first 12 months.

 

Peer to peer lending (P2P) allows investors to deploy capital in a broad suite of loan structures that previously only banks and large financial institutions could service. Various P2P lending internet platforms match the needs of borrowers and investors by giving them a way to deal directly with each other, thus eliminating the role of a bank. 

My involvement has been principally as an investor although I took the opportunity as a borrower on one occasion to check out how the other side of a platform operates. I experienced a degree of customer satisfaction that I’ve never experienced with a bank.

An interest in P2P lending was sparked when I was looking for an alternative passive investment not strongly correlated to equities or bonds. The idea of enjoying the fruits of a lender with regular interest payments being delivered without much work was very appealing. Until then, most of my wealth was achieved with hard work in running businesses and developing properties. Returns of 15-25% per annum were achievable but with much stress, hard work and risk.

Initially I had reservations. I was concerned about whether there was adequate regulation of the platforms, what level of risk existed for fraudulent losses, and the actual capital risk of the investments. I saw this new type of lending was poorly regulated or completely unchecked in some countries. For example, Ezubao in China allegedly defrauded investors of over $8 billion USD, and I didn’t want to become another statistic for amateur investing gone wrong.

I investigated further. My criteria for investment were: transparency of operations, financial strength of the platforms, website functionality, liquidity of investments, asset backing of loans, loss protections, diversification (loan types, geographic regions and currency) and returns.

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My criteria for investment were: transparency of operations, financial strength of the platforms, website functionality, liquidity of investments, asset backing of loans, loss protections, diversification and returns.

I found many vendors in Australia’s burgeoning fintech industry, as well as in Europe. To diversify risk, I decided to spread my loans between players in both regions.

Most P2P lenders are also the loan originators. They seek investor capital to finance their loan books. Many types of loans are catered for by P2P lending and each have different appeal. For liquidity, I like investing in invoice financing and short term personal loans. For asset security, mortgages appealed to me, and to a lesser extent, car loans.

In Australia where I’m based more than half my time, my preferred P2P lender is MarketLend. They are a business loan provider that allows investors to participate in each loan individually. You can choose businesses to invest in based on their financials, size, market segment etc. The returns are based on risk of default, with net returns ranging from 9-18%. Some loans are insured by a third party insurer thereby largely eliminating default risk. The loans are generally on 6-12 month terms, which offers considerable liquidity.

There are other providers in Australia, including Society One, RateSetter, and Thin Cats. Each have different appeal. RateSetter is one of the fastest growing due to its risk minimising strategy. It funds a separate trust account from borrowers to provide for future losses. It has thereby prevented any loss to investors of its loans of over $100 million in Australia. The short term loan I took with RateSetter was easy to set up and quite competitive compared to bank loans.

Its parent company in the UK has been in operation for over a decade and has loaned over £800 billion without a penny of loss to investors. This is very impressive, though the safeties in place are reflected by a lower rate of return. Five year loans in Australia return approximately 9% p.a.

For global diversification I have invested funds in the Latvian based platform Mintos. This operates as a pure broker between investors and loan originators. It allows diversification of loan types and regions, but the loan security is dependent on the strength of the loan provider as well as the individual borrower. This is one of the platforms I learned to trust most of all.

The loans I have backed have been spread over various geographies, from Latvia to Spain, and a variety of loan types. Numerous loan originators on this platform take over all loans that age over 60 days, and absorb the default costs. This provides investors with great security on the actual returns they can expect to achieve.

Loan originators provide up to date financial information on the platform so investors can assess their financial strength. I have found Mintos to be wholly transparent about all loan information. As an investor you can download the entire loan book each day. Alternatively all loans are tabulated by originator, loan type and state of the loan. They have processed over 300 billion Euro in loans with only 60,000 Euro of bad debts. As you can loan as little as 10 Euro in any one loan it is easy to diversify risk of loss. My returns on their platform always range from 12-18%.

How have my investments fared over the past year? The spectrum of rates of return have been 10-18% with an average return of over 13% across all platforms and loan types. Two of my loans are in default (representing 0.25% of total loans made) but both are conservative leveraged mortgages so my absolute losses will be minimal.

I am very happy with these returns, because by nature I am risk averse. The vast majority of my loans are protected from default loss so my rates of return are lower than the absolute amount that can be achieved in P2P lending. I would tolerate a default rate of 1-3% per annum to achieve my 10% targetted return but at this stage it appears defaults will represent a fraction of this.

A strength I see in P2P lending is the ability to diversify investment capital away from the more volatile equity and tepid bond markets.

A strength I see in P2P lending is the ability to diversify investment capital away from the more volatile equity and tepid bond markets. Long term, I will limit these investments to 10% of my portfolio. Currently I invest approximately 20% of my assets in P2P lending as, having proven its safety and returns, I have become something of a bull. As the world catches up I expect rates of return to diminish. The relatively asymmetric risk/reward may only be on offer for the next few years.

Some risks I see in the P2P lending system include the fact that the industry is still new, and its rigour in a downwards economic cycle has yet to be tested. Also, outside of a few countries, regulatory frameworks aren’t yet sufficiently in place to patrol these services, which may create some risk. Diversifying across multiple platforms can reduce this.

If you missed the Internet boom and can’t get on the property ladder, you can make a start in P2P lending for as little at $10. Spread your risk around. Be consistent. Make your money work for you. Get a passive income for retirement. It could be a smart move for you as it has been for me.

 

Disclaimer: The author has active investments in Mintos and Marketlend and has previously borrowed money from RateSetter.

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About the Author

Nicholas Read is a researcher and bestselling sales author, who was formerly Executive Director of Ernst & Young’s revenue growth advisory practice following a career in sales and management. His sales coaching methods have been deployed to more than 40 countries, helping clients win more than £20B more than forecast.

Anthony Mahler is Co-Founder of Omega Health in Australia, and has been investing in property, shares and alternative trading for 20 years.