Australian P2P market tipped to hit A$20 billion by 2020

Peer-to-peer lenders have the potential to grab around eight per cent of the unsecured consumer finance market and an even bigger slice of the unsecured small business lending market by 2020, according to new research.

Morgan Stanley has issued a report on the global P2P market, in which it ranks Australia as one of the standout emerging markets, with China and the United Kingdom.

P2P lending makes up one per cent of the US unsecured consumer and small business lending markets today but is expected to reach ten per cent by 2020.

Australia P2P lenders have very small balances today but, according to Morgan Stanley, are heading in the same direction.

According to the report, the appeal of P2P is that it is fast, convenient and cheap. Lending platforms have been designed to operate in the online and mobile banking environments.

Morgan Stanley said Australia was fertile ground for P2P lenders because use of the internet and mobile phones is high, the unsecured personal and business lending markets are neglected by the big incumbents and lending margins are high, allowing for aggressive price competition.

"We believe that margins in unsecured consumer lending have expanded more since the financial crisis that in any other major product segment," Morgan Stanley said.

The change to comprehensive credit reporting in Australia is also a factor because it will make it easier for new entrants to assess borrowers' creditworthiness.

Morgan Stanley puts total unsecured consumer debt in Australia at A$101 billion, with the "addressable market" for P2P lenders around $75 billion. It expects P2P lending to consumers to grow to $10 billion by 2020 - eight per cent of the total addressable market.

It puts the addressable unsecured SME lending market at around $72 billion. It expects P2P lending to SMEs to grow to $11.4 billion by 2020 - 12 per cent of the addressable market.

It won't all be plain sailing, however. Morgan Stanley said P2P lenders would need to develop strategic alliances to expand distribution, achieve scale and acquire customers efficiently.

It also cautioned that platforms are untested and regulatory responses uncertain. No one yet knows how good the underwriting processes are and how the regulatory environment will evolve.

"ASIC is focusing on responsible lending and the sale of alternative investment products. Regulatory scrutiny could limit the growth prospects for retail funding of marketplace models," the report said.

The report argues that the term P2P is a misnomer because the biggest group of investor/lenders is institutional investors. Its preference is for "marketplace lending."