P2P Lending: How This New Technology Can Help You Grow Rich

I’ll bet you wish your penny-pinching bank paid you a higher interest rate.

I wish my bank did. The mongrels had the hide to slash the interest rate on my savings last month.

Apparently they didn’t get the memo that the Reserve Bank of Australia hasn’t cut its target cash rate in more than six months.

Private investors like you and I haven’t had too many options to keep our cash working hard.

Until recently you could either like the banks or lump them. Keep your coin on account or stash it under your mattress.

Meanwhile, on the other side of the ledger, personal and business borrowers have suffered at the whim of the big four banks for far too long.

Good luck convincing a bank manager to lend you money unless you can show him or her a long and distinguished credit history.

Australian savers have never had a worse deal…but most borrowers find credit scarce and costly.

But all of this is about to change in a major way.

A technological innovation will let you say ‘sayonara’ to the banks. You can thumb your nose at their paltry savings rates, and source credit elsewhere.

What’s more, you could even profit from this innovation through the stock market. Let me explain…

The new technology I’m talking about is peer-to-peer (P2P) lending.

Think of it as banking minus the banks.

Online P2P lending platforms match borrowers and lenders directly. The loans that the platform issues are often made up of lots of tiny slivers from different individual savers.

It reminds me of our modern electronic stock exchanges. They determine prices by matching bids and offers of various volumes.

If I want to buy $10,000 worth of stock in a liquid company like BHP Billiton Ltd [ASX:BHP] I don’t have to wait for a shareholder to offer me the shares in that specific volume.

In the same way, P2P lending platforms match relatively creditworthy borrowers with savers who want a better rate of return on their money.

The result is a better deal for both sides.

Borrowers can access funds at rates far below those charged by a typical credit card company…and savers can earn interest at reliable rates that are better than those on offer with the big banks.

I should mention at this point that these higher returns for savers aren’t risk-free.

Lenders on P2P platforms aren’t protected by the federal government’s bank deposit guarantee.

And you have to recognise the risk that borrowers might default. To moderate that risk, P2P lenders generally set up provision funds for investors that are funded through an additional borrower charge.

Wresting Back Power

The lending platform’s owner can make money by charging for access…whether it’s by taking a small percentage of the funds it matches, or by imposing a monthly access fee.

It’s a great model. P2P lenders are revolutionising the consumer credit industry. And thetechnology and willingness to run this service has only existed for a few years.

Just look at how the P2P lending market has taken off each month since it kicked off in the US. And that growth has rocketed ahead into 2014.

More and more people around the world are wresting back power from the major banks by choosing to borrow and invest through P2P platforms.

And now P2P lending has come to Australia.

The big banks take this threat seriously. So much so that Westpac Banking Corporation [ASX:WBC] recently bought a $5 million stake in Australia’s first P2P lender, SocietyOne.

Competition for the P2P dollar will heat up later this year when British group RateSetter, one of the world’s biggest P2P lenders, opens for business down under.

These developments tell me that P2P lending is here to stay.

They also tell me that the big banks can’t come up with the cutting-edge financial services that consumers want.

That’s because banks’ layers of bureaucracy stifle bright ideas like P2P lending platforms long before they get off the ground.

There’s only one way that big banks can benefit from these kinds of exciting trends. It’s by shelling out to buy companies like SocietyOne once they’re established.

As is so often the case in business, the people who will make the most from P2P lending are nimble risk-takers and fearless entrepreneurs.

How you can profit

Innovation never stops in financial services. To reap the biggest rewards, investors have to stay ahead of the curve.

I can see three ways that you can benefit from the rise of P2P lending.

1.  By lending cash on one of these platforms, you can earn much higher rates of return than what the big banks offer on deposits. It’s not risk-free, but it’s a compelling alternative to investing in traditional assets like stocks and property.

2.  If you’re struggling to repay a difficult debt, you could cheapen your borrowing costs by sourcing credit through a P2P platform. Over the life of a loan you could save thousands of dollars in interest payments. But the costs and benefits will be specific to your personal financial situation.

3.  As a stock analyst who focuses on the small end of the market, this way is my favourite…

Certain Aussie P2P lenders are currently exploring listing on the Australian Securities Exchange. They may offer shares to private investors who can then participate in the growth of the business.

Imagine owning shares in a company like this. If the industry keeps growing as sharply as it has since inception, the ride could be exciting.

If the platform is robust and the business is sound, investing in a P2P lending company could prove to be extremely profitable for an investor with the appropriate risk profile.

But even before P2P investment opportunities arrive in Australia, there are already some huge opportunities for investors in early stage and small-cap financial companies.

Small-cap stocks are a risky speculation…but if you take the time to find the right ones, there can be huge rewards.

Tim Dohrmann+
Small-Cap Analyst, Australian Small-Cap Investigator

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