The Australian alternative finance market in 2017 could be littered with the still-warm corpses of P2P lenders that lacked proper lending practices and failed to scale up their businesses.
According to David Goldin, the founder and chief executive of Capify (pictured), the events that confronted marketplace lenders in the US last year could happen in Australia.
Goldin believes that many lenders risk being enamoured by their own technology and impatient with their own growth and have not mastered the basics of a tough business.
“I said this a year ago. Sure enough, what happened? Some of them went bust. I was spot on. My condition for survival is that you need to be profitable,” Goldin told AB+F while visiting the Altfi Australasia Summit.
Indeed, the US alternative lending industry endured a trying 2016, with even major powerbrokers from OnDeck Capital to Lending Club delivering poor loan volume growth.
Capify’s American-born, US-based founder, Goldin and his Australian managing director John De Bree helped pioneer the small business alternative lending jig in Australia eight years ago.
KPMG’s most recent figures put Australia’s alternative finance lending market at US$348 million.
Pricing for risk
After providing more than $100 million of SME finance since 2008, De Bree and Goldin bear the scars and - consequently – the lessons as Australia’s largest and most experienced alternative lender to small businesses.
Australian alternative finance lenders including Prospa, Thincats, OnDeck and DirectMoney are among a growing army of companies leveraging data and leaning on technology to establish a bridge-head into the $65 billion hinterland of the Australian SME lending market.
While “the hype has turned into reality,” according to Goldin, Australian alternative finance shouldn’t be mistaken for rocket science. It’s a lesson in lending, not a teaching of technology.
“Australia is learning from the US mistakes. No US lender has successfully been able to scale by stretching underwriting; charging too little; not pricing the risk properly and is not - right now - either bleeding money or in serious trouble.
“It’s irresponsible growth, they’re too caught up in the technology. Anyone can lend - getting the money back is the hard part. They forgot they were lenders, they were going out too long, the defaults got out of control.”
According to Goldin, “profitability” means not “just grabbing market share at any cost.”
In the alternative finance sector “you’ve got to be concerned about one thing – performance.”
“How will you perform in a downturn and most importantly how are you going to make money?” Goldin asks. “Because a down economy will undoubtedly shake out (the sector).”