The newly launched peer-to-peer (P2P) lenders may have to prove they can endure an economic downturn and become more transparent before becoming a major force in the personal/consumer loan markets.
They will also have to cope with more intense scrutiny from regulators examining a part of the industry which does not have to adhere to responsible lending guidelines nor report its performance to regulators and investors in the same way as banks or other financial institutions, says John Kensington, KPMG's Head of Financial Services.
He is the author of KPMG's non-bank financial institutions performance survey for 2015 and says the potential for the new P2P companies to disrupt the traditional market remains high.
P2P companies were set up when interest rates were low and employment high and "even though there is no evidence of that changing, many in our survey felt the real test of P2P lending would come in a downturn - when the danger of defaults rises," he says.
P2P investors are directly affected by any default - the P2P management company less so.
There are four declared entrants in the market at present - Harmoney, Squirrel Money, LendMe and LendingCrowd; not yet major players in spite of claims they would take on the banks, but it is early days yet and they are providing loans in a social and community context.
Most deal in smaller loans, says Kensington, and the estimated $150 million lent by P2P companies so far is only a slim slice of the total market. One of the new entrants, LendMe, has signalled it will loan up to $2m, far above the $35,000 and $70,000 maximum loans capped by Harmoney and squirrel respectively - although it had been negotiating a funding deal with a New Zealand bank.
"The P2P companies are not big players in the overall market yet though their models mean they are agile and efficient and provide another option for borrowers," says Kensington. "Their models have achieved a national presence from the get-go and have the ability to grow with little cost impact.
"There is no doubting their potential but the fact we cannot tell, in the traditional way, how they are performing is one reason why many think it will take a downturn to really test the P2P market.
"Some people think that means they are an accident waiting to happen and that, if things go wrong, they will do as much damage as the collapse of the finance companies a few years back."
P2P is promoted as an alternative to bank loans, credit cards and other consumer lenders. It also offers investors on the platform potentially higher returns than traditional bank investments; the fact its "community" of investors and borrowers (ranked as credit risks) are matched directly also appeals to many who like the fact the "middle men" - banks and other institutions - are effectively cut out.
Kensington says with the exclusion of the middle men comes acceptance by the investor of direct credit risk; the calculated credit ratings and their accuracy applied against each borrower by the platform become the major line of reliance for each investor.
"This also assumes that an investor understands what each rating means, in credit scoring terms," he says. "For many, a C2 might be interpreted in terms of a school grade (i.e. quite good) when in credit terms it holds significant risk."
"People investing in other people" is how the P2P lenders often describe their operations. It is a completely digital process, with the P2P management company acting as a broker or matchmaker, organising the transactions through its website, undertaking credit checks, facilitating repayments and chasing up any defaults.
The P2P vehicle charges fees to both investor and borrower and some may also take a small cut of the repayments. Some, like Harmoney, the best-known P2P company so far, reduced the risk by splitting or fractionalising loans into $25 parcels. That also allows lenders to spread their investments across different individuals and loan situations.
Harmoney, according to one report earlier this year, has made more than $100m in loans and had 7500 loans active after 70,000 loan inquiries - only a maximum of 20 per cent of loan applications are approved.
Harmoney has already changed its fee structure ahead of the Commerce Commission finishing its review of whether P2P fees are covered by the Credit Contracts & Consumer Finance Act (CCCFA). The company voluntarily changed its platform fee charged to borrowers from between 2-6 per cent of the loan to a flat fee of $375.
Kensington says the demographics of P2P borrowers and lenders has been a surprise. Most had thought older people with spare cash would be the mainstay of the lenders with younger people forming most of the borrowers - but the profile was reversed.
Most lenders were younger investors, he says, while the average borrower was often an older person who could be going to a bank for the money and adding it to their mortgage - but some just "didn't want the bank to see what they are doing or wanted the quicker borrowing experience offered by the P2P digital front end.".
P2P companies have not had a totally charmed run overseas - the 2011 collapse of British company Quakle was the most noteworthy as investors lost their funds (though the total amount was, in comparative terms, small). In China this month authorities froze 1.1 billion yuan of funds by one P2P platform as part of an investigation into alleged banking and illegal fundraising violations.
In the end, says Kensington, successful P2P enterprises may well become acquisition targets for banks and other financial institutions or private equity investors - ironic if so, as P2P was provoked partly by an increasing consumer market who wanted an alternative to existing suppliers.