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Banks' personal loans and credit card business in the sights of peer-to-peer lending applicant Harmoney

Posted in Personal Finance
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By Gareth Vaughan

Harmoney's CEO says his company aims to attack banks' most profitable lending business, undercut the interest rates they charge borrowers, and target term depositors with offers of double digit interest rates.

Harmoney is one of the companies intending to apply to the Financial Markets Authority (FMA) for a peer-to-peer lending licence. Neil Roberts, Harmoney's CEO and controlling shareholder, told interest.co.nz in a Double Shot interview banks can't compete directly with peer-to-peer lenders because it would cost them too much, and they'd have to admit the deposit rates they pay are low.

Roberts' previous roles include head of sales and business development at Flexigroup, general manager at Pacific Retail Finance which was bought by GE Finance and Insurance in 2006, and sales manager at AGC Finance. He's Harmoney's 98% owner with the Icehouse having a 2% stake.

"If you look at the credit card and personal loan market, and you look at the banks because this is a competitive play against the banks on both sides of the equation, the big four are the most profitable in the world," Roberts said. "I know that interest.co.nz have recognised that in past articles. And within the most profitable banks on the planet, the most profitable categories are credit cards number one and personal loans are number two."

"In fact in our own assessment, credit cards are 12 times more profitable than the rest of the bank and personal loans are 10 times," said Roberts.

"So the beauty about personal loans is we're attacking a very profitable part of the banks' business, but it's a very simple product that has produced a result for the bank that's near riskless because it's so predictable."

Debt consolidation was planned as a "very big" part of the business, Roberts added.

"Mainly it's getting rid of very expensive credit card debt where people are paying off minimum payments and they've got that credit card debt for a very long time. It's bank rated customers, it's just people who have run up a bit of debt and they want the simple benefit of being able to pay that off in fixed instalments knowing that they'll get to a point where they'll have no debt."

'There's no leverage'

He said the "elegance" of the peer to peer lending business model is there's no leverage.

"So we're not loaded up with debt like a bank," Roberts said. "We have no branch network, we're fully automated with good support behind it. Our costs are a fraction (of banks' costs). In fact we believe the banks can't compete, and can't get close to our cost base."

Peer-to-peer lenders are certainly starting to appear on banks' radar screens internationally. Westpac recently invested A$5 million in Australia's SocietyOne (currently only open to "sophisticated" investors), Spain's Santander has partnered with British peer-to-peer SME lender Funding Circle, and Barclays has bought 49% of South Africa's RainFin. The highest profile US peer-to-peer lender, Lending Club, is now valued at US$3.76 billion ahead of an expected initial public offering.

As a peer-to-peer lender Harmoney would run an internet platform that introduces lenders to borrowers. It plans to offer both secured and unsecured loans. Roberts expects the average investment from retail investors in the early days to be about $5,000. Borrowers by law can't borrow more than $2 million annually.

Roberts said lenders, or investors, will enjoy "full retail rates."

"There's no bank in the middle taking that margin which is exactly what happens when people put their money on term deposit. The bank takes the risk, whereas in our case obviously the lender takes the risk. But we believe it's a predictable risk."

"It's simply that, they (lenders) are enjoying the full retail return. For the first time we have a fixed term, fixed interest product where we've opened up to retail investors the retail rate."

Spreading risk

Roberts acknowledges credit losses via peer-to-peer lending are inevitable. Therefore Harmoney plans to break down loans to $25 lots to spread lenders'/investors' risk.

"So if a borrower applies for $10,000, we'll break that down to $25 lots (from lenders). And we encourage people to take a huge spread of their risk so if any one loan does get into trouble, it's only a very small part of the overall portfolio."

"In doing so we're able to produce retail results net of all cost and net of a predictor credit loss that is in the double digits on average."

That means interest rates paid to lenders, after costs and after credit losses are taken account of, in the double digits, Roberts said.

How interest rates will be priced

Interest rates will be priced via Harmoney's scorecard. A risk grading system features 30 grades ranging from A at the top to G at the bottom. This is similar to how Lending Club prices risk. See Lending Club's pricing details here.

"It's a wonderfully transparent system. You (the lender) get to see, if you want to, the loans, the application, the credit file. The only thing you don't see is anything that can identify the borrower. And you pick which loans you want to invest in," Roberts said.

Harmoney will make money by charging fees through a repayment fee for lenders, and an origination fee from borrowers. The origination fee will vary depending on the credit risk. As Harmoney's yet to apply for a licence from the FMA, Roberts pointed to the fees charged by Lending Club as an example.

"The average is about 4% charged flat to the borrower upfront, so a 10 grand loan is $400. And then on the other side it's 1% taken from the repayments that are made each month, which works out at about half a percent per annum on the amount you have invested," said Roberts.

"These businesses are low margin, but they're low capital and they're low operational cost. It's obviously important to get volume."

The regulations enabling the development of peer-to-peer lending do allow for institutional funding, and Roberts expects to see some of this.

'An alternative investment class going mainstream'

Roberts said he hopes over the next few years peer-to-peer lending will go from being an alternative asset class to something that's mainstream in New Zealand.

"You wouldn't be putting all your investments, or all your retirement money, into peer to peer but you'd be putting an element of it in. The vision is to be part of New Zealand's savings and to keep the banks honest. Because we can start with personal loans, but there are certainly opportunities down the track as you've seen with Lending Club going firmly into that SME market," said Roberts.

"We're hoping people will grow with us, see this for what it is; A disruptive play against the banks."

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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11 Comments

Gareth - Very good

Gareth - Very good interview.
Neil Roberts - How would I invest in Harmoney itself as opposed to using the lending platform.

Hi Andy - thank you for the

Hi Andy - thank you for the positive note. Perhaps you could drop me a line by email and we can discuss? Email is neil@harmoney.co.nz. All the best, Neil 

I only watched a minute of

I only watched a minute of this interview.
If this chap wants to sell NZ a new, out of the box product, he needs to learn to do it while not chewing his words, and looking all over the place.
He may well have a good idea, and a good plan, but if you can't sell it, you don't exist.

Comments noted Officebound.

Comments noted Officebound. Thanks for the feedback, I have taken a lot from the interview and can only improve! Vaughan did a great written summary that may help. Cheers, Neil

Not sure what minute you

Not sure what minute you watched? I am surprised this comment has been allowed to remain and not been moderated out.

Anything that undermines the

Anything that undermines the near monopoly of the big banks over lending and cuts them out of the equation has to be a good thing. Will be watching with great interest.
Just one thing though Neil - where and how does HarMoney itself actually make its money? Presumably a cost is added to each transaction which yields your cash flow?

Hi King of W!  thanks for the

Hi King of W!  thanks for the comments. Harmoney makes money in two ways. An up front fee from the borrower based on risk grade. Currently considering between 2% and 5%. And then the second way is a 1% of repayments from the investor/lender, this is for the ongoing work we do to maintain the account and platform. Works out to about 0.5% of the capital invested per annum. Please join our mailing list at harmoney.co.nz if you would like more information. Trust this helps. Neil 

Yes just been on your site,

Yes just been on your site, and signed up, thanks.

So this is a finance company

So this is a finance company in essence.

Do borrowers have to provide

Do borrowers have to provide security?

JT, as the story above notes

JT, as the story above notes Harmoney is planning both secured and unsecured loans. And in the recent interview I did with the FMA's Elaine Campbell, she said whether P2P loans are secured or not will be up to the lender - http://www.interest.co.nz/personal-finance/69367/online-dating-services-...