Squirrel Mortgages owner eyes P2P licence for 'Squirrel Money' offering loans to home owners, investment opportunities for retail investors

Squirrel Mortgages owner eyes P2P licence for 'Squirrel Money' offering loans to home owners, investment opportunities for retail investors

By Gareth Vaughan

Squirrel Mortgages principal John Bolton is eyeing a peer-to-peer lending licence as he aims to launch 'Squirrel Money' next year offering personal loans to existing home owners.

Bolton told interest.co.nz in a Double Shot interview he is applying to the Financial Markets Authority for a peer-to-peer (P2P) lending licence. Bolton says if all goes well on the licencing front, he aims to have Squirrel Money up and running by about late February 2015.

"In terms of launching the business we've kept it pretty simple. The focus is on personal loans, both secured and unsecured. We're looking at doing unsecured lending up to $35,000 and secured lending up to $70,000, keeping it pretty simple because the market is young," Bolton, a former general manager at ANZ National Bank, said.

" It (P2P) is not going to grow that fast and I'm not a big fan of complexity. I think you need to have a pretty simple proposition in market that people can understand and get their head around."

Harmoney, New Zealand's only licenced P2P lender so far, offers loans of up to $35,000. With Auckland-based Squirrel Mortgages already an established business that Bolton said writes close to half a billion dollars worth of mortgages annually, it has a significant client base. Bolton said Squirrel Money is looking at doing high quality personal lending to existing home owners.

"Our observation would be in our market, the market that we're dealing in, which is generally home owners, there's an opportunity for us to help them with things like house renovations and that sort of thing that would dictate a larger loan size (than the upper limit of Harmoney's loans)," Bolton said.

"A large chunk of our (lending) will be secured, ... probably a caveat lend, and it's just to make it easy particularly with things like renovations. If you look at the LVR restrictions it does make it difficult to even do small renovations above 80%," Bolton said. "We can potentially facilitate that process, make it easier, and at competitive interest rates."

He said Squirrel Money's likely to charge borrowers interest rates of between 10% and 14%, and investors are likely to be paid interest rates, after expected credit losses, of between 8% and 10%.

Squirrel Money will have the type of credit management you'd expect from a bank, Bolton added.

"We'll have a credit scoring system, (and) we've got a full online process from start to finish including automated credit scoring. Once the system's up and running we should be able to issue an approval in five minutes. In the back end we're going to have some different ways of managing that credit risk for investors. We won't be fractionalising the loans  (spreading one loan between different investors as Harmoney does). We've got a different process for managing that risk."

He wouldn't elaborate - at this point - on what that process is.

Strictly for retail investors

Harmoney has taken in about $100 million of lending capital from institutional investors such as US firm Blue Elephant Capital Management and Harmoney's 10% shareholder Heartland Bank. However, Bolton said Squirrel Money won't be following this lead with its focus solely on retail "mum and dad" investors.

"I just don't think the market's going to take off fast enough to warrant institutional investors. We'll have a pool of money that's readily available for us so we can pretty much issue loan offers straight away and therefore keep some liquidity in the market and keep things turning over. But I just don't see the need for institutional money," said Bolton.

"I don't think we need it and I'd much rather see regular retail investors getting a good return on their money than that being sucked up by institutional investors."

He doesn't expect P2P lending to take off like a rocket ship, but does see lots of long-term potential for what's a low cost business model compared to banks and finance companies.

"if you look at the UK market, the total market size there is about NZ$2 billion. That sounds big because it is. But they've got a population of 65 million people so if you convert that back to a New Zealand context, that would be a total market size of around $130 million."
 
"If you take a step further and say 'this stuff is written at margins between say 1% and 2%,' then it says the total revenue pool for that market in the shorter-term is possibly somewhere between $5 million and $10 million," said Bolton.

"I certainly think over the next five to 10 years the (P2P) market will get pretty significant. It's a bit like KiwiSaver. Low margin, low cost of delivery, it takes time. But in 10 or 15 years time we'll look back and there'll be an entire new industry and you'll go 'wow.'"

NXT listing on cards

Bolton notes it'll be interesting to watch P2P through a full credit cycle, including a recession, to see how it performs in bad times as well as good times.

"I think these things are all good and well when the market's relatively buoyant and credit losses are really low. The real test of these systems is probably another five or six years away. At that point it'll be really interesting to see just what sort of future the peer to peer industry has. One would argue it's really strong because the sort of disciplines being put in place in the industry aren't dis-similar to the sort of disciplines you'd expect from a bank."

Separately Bolton said the broader Squirrel group may look to list on  NXT, the new NZX market designed for small and mid-sized businesses, during 2015, and he may seek a Qualifying Financial Entity (QFE) licence.

Aside from Squirrel Money, at least one other entity hopes to obtain a P2P lending licence over the next few months. Wayne Croad, managing director of non-bank deposit taker Finance Direct, is applying for a P2P licence for Lending Crowd.

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