In Australia’s personal loan marketplace, the big four banks – Commonwealth Bank, ANZ, NAB, and Westpac – are dominant, currently holding 85% – 90% of the industry’s market share. The personal loans marketplace in Australia is worth $26billion annually, so is clearly a lucrative opportunity.
What really stands out about these statistics is not so much the numbers themselves, but the fact that the big four banks don’t actually care that much about personal loans. These banks make their money from mortgages, corporate banking, and their other headline products. To take such a huge chunk of a marketplace they’re not really that bothered about is clearly great for them; if you could be paid huge sums of money for a second job you didn’t have to give that much attention to, what would you do?
The big drawback of taking a personal loan from the big four banks is that because personal loans aren’t their primary – or even a focus – product, consumers aren’t always sold what is necessarily the best deal for them. “One rate for all,” whereby each customer is given the same interest rate regardless of credit history, is a common trait of borrowing from the big four. In addition, there is a lack of flexibility available in their personal loan products, while people are treated as numbers, not humans, and the customer service levels provided can leave a lot to be desired. While the big banks don’t focus on personal loan products, this lack of focus is ultimately only felt by you, the Australian consumer.
You don’t get an interest rate relevant to your circumstances, you usually can’t speak to someone when you need to, and when you do speak to someone it will be someone different each time.
This isn’t the way to treat valuable customers, and consumers in Australia are now becoming increasingly aware of the alternatives to bank lending.
Alternatives to Bank Lending
Alternatives to bank lending have already proven popular in other locations across the world. By looking closer at what these alternatives are, we can understand why they are successful, why consumers love them, and also how these alternatives have the potential to become a big success story in Australia, particularly over the next two years.
A Note on Small Bank Lending
Though small banks, both in Australia and elsewhere around the world, offer personal loan products and present themselves as a real alternative to the big banks, in truth these organisations will often have even less of a focus on personal loans. Yes, they will sell you a personal loan, but the service levels and lack of flexibility available in the product won’t be an improvement. Depending on who you take a loan out with you might even end up with a more expensive loan and a lower level of service!
Overall, consumers are moving away from banks entirely, and it is here where the true alternatives lie.
Peer to Peer Lending
Peer to peer lending matches’ lenders to borrowers online. Someone looking to borrow money goes to a peer to peer lender’s website, puts in their loan requirements, and is given an offer. Peer to peer lending was late in coming to Australia, with Society One being the country’s first peer to peer lender, launching in 2012. Consumers like peer to peer lending as they enjoy the feeling of borrowing from another person rather than a bank.
The world’s first peer to peer lender was Zopa, which was founded in the United Kingdom in February 2005. The scale of Zopa’s success has been such that as of June 2016 it had issued £1.5billion worth of loans (just over $2.5billion based on November 2016 exchange rates). Other peer to peer lenders have followed in the UK, with Funding Circle and RateSetter – who are also popular in Australia – making up the top three lenders. The size of the peer to peer lending market in the UK alone is £3billion (just over $5billion), although this also includes lending to businesses.
Peer to peer lending hit the United States in February 2006, with the first two lenders to market, Prosper and Lending Club, still the biggest two providers in the country. Lending Club is in fact the world’s largest peer to peer lender. One sign that peer to peer lending is becoming firmly established as a mainstream alternative to bank lending is the number of executives from banks and other finance companies that are now joining peer to peer lenders.
The main drawback of peer to peer lenders is their reliance on continuous investment to be able to continually offer loans. In a competitive marketplace there are numerous options for individuals looking to invest into a peer to peer lender, though for consumers this can mean uncertainty regarding their personal loan were their lenders situation to change.
Non-Bank Lending from Finance Companies
More common than peer to peer lending, and what we believe will be the biggest change in the Australian personal loans marketplace in the coming years, is borrowing from finance companies that aren’t banks.
This is the type of lending we provide here at NOW FINANCE, but again it is already common and popular with consumers elsewhere around the world. Consumers can find non-bank lenders and opportunities for borrowing both by contacting them directly or by dealing with a finance broker.
In the United States, OneMain, who are owned by CitiGroup, are one of the main non-bank lenders, while Lending Tree is a leading finance broker matching individuals to specific types of loans such as debt consolidation and vehicle finance. The United States also has a number of non-bank finance companies that specialise in specific types of loan. Lyon Financial, for example, are specialists in providing loans for swimming pool installations.
There are also numerous non-bank options available in the United Kingdom, though the range of offers varies dramatically depending on the provider. Better and more popular options for consumers in the UK include AA Loans – AA acts as a broker and gets the money from a bank, but consumers will always deal with someone at AA – Hitachi Finance, and Be Savvi. There are other non-bank lenders such as Ocean Finance, but their loans often have a higher interest rate than even the credit cards they offer!
In New Zealand, Gem Finance and Harmoney are among the most popular non-bank finance providers, though they also offer other products alongside personal loans they do provide a focus on this market.
Consumers like non-bank lenders like ourselves here at NOW FINANCE, and some of the other lenders in the examples above, because they offer a more focused, specialised service. There is a specific focus on personal loans as a product, meaning there is a wider range of options available for customers, while this focus also feeds through into customer service and the wider operation of the business.
Has This Happened in Other Industries?
Alternatives from the “traditional providers” are now available in most industries, in countries around the world. Whether it’s internet providers, places to sell your car, or who provides gas and electricity to your home, there are numerous examples of specialist companies making inroads into marketplaces dominated by a handful of major businesses.
The trend across each of these is largely the same as what we have described with the big banks and personal loans. As larger businesses in any industry grow, their focus shifts and they may even diversify away from what made them successful in the first place.
That’s when specialist, focused companies are able to get market share, by offering, among other things:
- Better products
- Cheaper products
- A better level of service
What Does This Mean for Non-Bank Lending in Australia?
Through our own research and by always speaking to our customers, we know that here in Australia the tide is turning and consumers are looking away from both the big and small banks when it comes to borrowing money.
In the next couple of years, we believe a handful of non-bank lenders will emerge not just as the best alternatives to the big banks, but establish themselves as mainstream lenders and take a significant chunk of the $26billion personal loans industry. Naturally, as one of those non-bank lenders, we are aiming to ensure NOW FINANCE is at the forefront and is the name every Australian thinks of when it comes to non-bank lending.
Each non-bank lender, whether a finance company such as ourselves or a peer to peer lender, will have their own approach, but what all will have in common is a desire to take up the slack that the big banks lack of focus on personal loans leaves for consumers.
At NOW FINANCE we know all of our customers are people, not numbers. That’s why every single personal loan application that comes through to us is assessed by a person. You won’t be declined for a NOW FINANCE loan just because a computer system says you don’t score highly enough.
We know that everyone’s circumstances are different, and that the “one rate for all” approach of the big banks is not just inflexible, it is also unfair. That’s why at NOW FINANCE you’ll receive a personalized interest rate based on your credit score range. We lower your interest rate if your credit score range indicates you are likely to be a reliable borrower, saving you money on your repayments or perhaps making a larger loan more affordable for you.
When you are accepted and become a NOW FINANCE customer, we want to continue getting to know you. That’s why you’ll be assigned your own personal account manager, and every time you need to speak to NOW FINANCE, that’s who you’ll speak to.
We want to know why you need a personal loan so we can offer you the best possible service. We already know that 60% of the personal loan market in Australia is for loans that are used to finance a vehicle purchase. We also know that these are often secured loans, meaning your new car is the collateral used as security against the loan, but with NOW FINANCE you can get an unsecured loan of up to [loan_max_un] to fund a vehicle purchase.
We also know that after vehicle finance, the most common reasons for seeking a personal loan in Australia are debt consolidation and home renovation, so we offer loan options around these needs, too. In fact, at NOW FINANCE we offer the widest range of personal loans you are likely to find anywhere in Australia. Whatever you need or are looking to buy, we can provide you with a suitable loan.
By offering risk based pricing of loans we can provide a competitive alternative to bank lending. We also don’t have the high profit margins that the banks build into their personal loan products, so will probably be able to save you money even if your credit score means you’re given an interest rate at the higher end of our range.
At NOW FINANCE we pride ourselves on our personal service and on getting to know you. That’s why you will speak to the same person each time you call us, and why you’ll hear from us from time to time while repaying your personal loan. We don’t just take your repayments and send you statements, we want to know who you are!
What This Means for the Personal Loans Marketplace
A more diverse choice for consumers can only be a good thing. While non-bank lenders are likely to become part of the mainstream, it remains to be seen whether the bank lenders react or make changes both to their products and to how they deal with customers. This will likely depend on the extent to which any significant loss of market share from personal loans impacts elsewhere in their business. That said it is unlikely the big banks are going to change over the next couple of years, but for them it may be a longer-term evolution over 5 – 10 years, particularly if other non-bank businesses enter the marketplace for other products that are key to their revenue and profit generating abilities.
What we do know is that the new alternative to bank lending is here in Australia, now.
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