Retail lending is simple: you lend your money to those who want to borrow it. They pay you back the initial amount borrowed plus interest. This interest forms the returns you earn.
Essentially, you kind of become your own small-scale lender, only lending to vetted, creditworthy borrowers.
A retail platform like Plenti’s is an easy way to match borrowers and investors — it’s like an online marketplace, but for money.
As they just operate online, retail lenders don’t have the same overhead costs as traditional banks and credit unions. This means you earn better returns as an investor, and borrowers get better interest rates.
A retail lending platform does have some similarities to a traditional lender. It checks a borrower’s credit, including credit history, employment status and credit score. The platform also manages all the details with the loan like establishing contracts, organising payments between borrowers and investors, and managing each investor’s portfolio.
Basically, it does all the hard work for you.
As an investor, this is great news. You get to avoid all the administration of dealing with lending out your money, but you get returns from both principal and interest as borrowers make regular payments.
Creditworthy borrowers love retail lending because they get to access funds for major purchases, at competitive rates, without the hassle of dealing with traditional banks.
Retail lending is one of the fastest-growing areas in financial services worldwide. Right now investors lend billions of dollars worth of loans each year.
Technology is a big reason why retail lending is taking off. Online platforms and marketplaces make it easy to connect borrowers and investors. In fact, retail lending is forecast to grow over 19% a year between 2019 and 2024, by which point it will be worth ~US$15 billion globally.
Here are some of the reasons for the growth:
the recent adoption of comprehensive credit reporting in Australia;
the introduction of Open Banking in 2020;
increasingly stringent regulation of credit card debt and a move away from interest accruing credit card balances; and
the shift in consumer perceptions following the reports of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.