You’re earning how much? I asked, eyebrows raised, head cocked to the side.
“Well, I’m earning three times what you’re getting on your piddly UBank USaver, bucko”, said Craig, a fifty-something executive I met this week.
Craig wasn’t investing in shares. He wasn’t investing in property. He was investing in — get this — credit cards. But Craig isn’t a hacker — though he is using the latest technology, ‘Peer to Peer’ lending. (Which is pretty boring, so I call it ‘Dude to Dude’ lending.)
How does it work?
Let me explain with a hypothetical example:
Meet Pete the pensioner. He’s struggling to put bangers in his mash. He’s trying to live off his savings, but all he’s earning is a paltry 2.5 per cent on his online savings account. (Hence the bangers.)
Just down the road from Pete lives Barry. He’s a barista who’s spent too much money on tattoos and Brylcreem, and has racked up $6,000 on his credit card. He’s struggling to knock the debt on the head, because the bank is hitting him with 20 per cent interest.
Okay, so it doesn’t take Buddy Franklin to figure out that these two should hook up: what if Pete lent Barry the $6,000 — and charged him 10 per cent per annum? Win. Win.
And that’s what Dude to Dude (or Dudette to Dudette) lending is all about.
Tinder For Money Geeks
The market leader in this new way of lending is a startup called SocietyOne. They’ve built an online platform that allows people like Craig and his well-heeled mates to lend their savings and get credit-card-like returns.
Here’s the nuts and bolts:
A borrower jumps on to SocietyOne’s website and applies for a loan, which involves filling out a credit score report, plus some additional vetting. So long as their credit history comes back clean, they’ll be uploaded to the platform, where all SocietyOne’s registered lenders can bid on funding their ass(ets).
Think of it as Tinder — for rich old white people.
“Ooh, there’s a 26-year-old guy from St Kilda who has a rock solid job, a smooth, clean credit history … and he needs a loan of $24,000 to buy a motorcycle. Oh YEAH!”
SocietyOne says that, after a borrower gets approved, they’ll usually get their dough in around 48 hours. So in that way it’s not unlike applying for a credit card. SocietyOne lends amounts between $5,000 and $30,000 and, as with a credit card, borrowers don’t need to stump up any security to get the dough.
The Quick and The Nimble
I know what you’re thinking. For lenders like Craig it sounds risky, right? What happens if the said motorcycle dude rides off into the sunset, never to be seen again?
Never fear, there’s an algorithm near. SocietyOne’s platform allocates loans based on an investor’s stated lending criteria, like for instance only lending to people with a AA credit rating and a full-time job.
And here’s the clever bit: the platform also spreads the loans across hundreds of investors to lower the risk on any one borrower defaulting. On average, a SocietyOne lender will be diversified across a portfolio of about 100 loans, so investors will generally have no more than 1 per cent of their total investment in any one loan.
SocietyOne tells me that, since they began in 2012, their investors have averaged a 10.3 per cent per annum return (after the 1.25 per cent management fee and and loan write-offs). And the company is keen to point out that none of their investors has ever lost a penny of their invested capital.
The other way that SocietyOne reduces risk for investors is by actively looking for borrowers with the best credit histories, and rewarding them by offering them better deals than they can get with the banks. SocietyOne’s unsecured personal loan rate for those with an AA credit rating is currently just 8.95 per cent. So in that way their business model is the exact opposite of the model of payday loan predators like those creeps at Nimble.
However, as with any lender, the best customers for SocietyOne are those who pay the most interest, and don’t go broke. And in that regard, even an 8.95 per cent personal loan doesn’t cut it for me. If you’re really serious about getting out of debt, you should do an 18-month zero per cent balance transfer with St George Bank’s Vertigo Platinum card and clear your debt once and for all.
A Potential Profit Gold Mine
Thankfully (for lenders everywhere), I’m in the minority. You’d be surprised how many otherwise-intelligent people I know who have $5,000 on their credit card paying 18 per cent, and $5,000 in their bank account earning, well, two parts of bugger all. Over the years the banks have trained them to see their credit limit as their own money.
And that’s a big reason our Aussie banks are among the most profitable in the world, and why their most profitable segment is unsecured consumer lending (home loans may be at historical lows, but credit card rates haven’t budged in years). In other words, the banks have got a giant $28 billion target on their backs. And that explains why the Packers, the Murdochs and the Stokeses have all got an early stake in SocietyOne.
Right now, SocietyOne only allows sophisticated investors (like Craig) to fund the loans. However, Pete the pensioner will soon be able to get in on the deal, when they open up their lending platform to everyone later in the year (in fact, some of their competitors have already done this).
I’ve got to admit the concept of being a lender is appealing, though it’s a fundamentally different and much riskier investment than cash. For Craig, it’s a nice little earner. He tells me that his return has been around 10 per cent, and he’s done well over 100 transactions and hasn’t lost any money — yet.
And that’s the rub: I won’t be lending out any of my loot until I’ve seen how the concept stacks up through a good, hard recession. And that’s the one advantage that boring, low-paying, old-fashioned bank accounts have: they’re guaranteed by the Government
Tread Your Own Path!