The benefit of thinking like a bank

By Grace Ormsby

November 01 2019
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Lending money to businesses can offer investors a less volatile investment environment for a larger return than more traditional methods of investing, according to a P2P platform CEO.

Speaking to nestegg, TruePillars CEO John Baini outlined that “people would be surprised that lending is actually quite stable and generally quite predictable”.

As previously reported, P2P lending effectively sees the platform operator “disintermediating” a loan, which is then required to be paid back to the investor with interest.

For a product like the one TruePillars offers, Mr Baini said it “needs to be compared to other products where capital is at risk”.

“For example, you’ll see investors will invest in blue chip stock to earn a dividend yield, and those dividend yields are normally 6, 7 or 8 per cent,” he said.

But, Mr Baini countered, “you’ve got to live through some fairly big fluctuations in share price – so obviously at any point in time if you do need to liquidate and get those shares back, you’re always running that risk that the time and money may not suit the market”.

It’s a trade-off he noted “a lot of people are quite familiar with”.

“So, if you are going to consider peer-to-peer lending, obviously consider the yield but look at the relative difference in volatility,” Mr Baini advised.

“People would be surprised that lending is actually quite stable and generally quite predictable in comparison to stocks.”

He pointed to the business lending default rates noted by banks in “normal economic times” as below 2 per cent of all their loans, which only increased to “a bit under 4 per cent” during the global financial crisis.

With his platform offering a return of around 12 per cent before defaults across its books, it led to the CEO noting that “as long as you remain diversified as an investor, if that default rate of 4, or even 5 or 6 per cent does come through and you’re earning 12, then the outcome should be that you are still seeing a return of 6 per cent”.

“What you are trying to do with peer-to-peer lending is allow an individual investor to have the same experience as a bank when they’re lending money,” Mr Baini said.

“You build up a portfolio of positions in loans, most of which will perform and pay you interest and you should earn enough from that income to offset the small number of loans that do go wrong and default.

“After you’ve netted those losses off, you’ve made a profit, and that’s effectively lending 101.

“Peer-to-peer lending tries to open up that experience to investors.”

Nest egg's readers digest also on this article about new bank Australia.

About the author

Grace Ormsby

Grace is a journalist on Momentum Media's nestegg. She enjoys being able to provide easy to digest information and practical tips for Australians with regard to their wealth, as well as having a platform on which to engage leading experts and commentators and leverage their insight.

About the author

Grace Ormsby

Grace is a journalist on Momentum Media's nestegg. She enjoys being able to provide easy to digest information and practical tips for Australians with regard to their wealth, as well as having a platform on which to engage leading experts and commentators and leverage their insight.

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