Crowdfunders sniffing round banks' territory

The Bondi development shows crowdfunding is being taken seriously in better suburbs. Photo / Martin Sykes

Once the home away from home for down-at-heel Kiwis in Australia, these days billionaire James Packer, Australian cricket captain Michael Clarke and a host of business leaders live or have lived in the Sydney beachside suburb of Bondi. The Bondi Icebergs, once a working man's swimming club, is now home to a fashionable restaurant that the A-list likes to be spotted in. Most Australians and Kiwis can't afford to buy there any more.

Now Sydney property company Mirvac is using crowdfunding to help fund a Bondi apartment development, with investors able to put in as little as A$100 ($104), rather than the minimum A$50,000 that's usually required.

The move has a lot of novelty value and is no more than a toe in the water for this new funding model - Mirvac is crowdfunding only a single one-bedroom apartment in Bondi and another one in Sydney's inner west. However, the fact that a credible listed company like Mirvac is raising money via the crowd is a sign that these new ways of funding investments are being taken seriously at the big end of town. And these new funding models have the potential to break the banks' virtual stranglehold on lending.

Australia's banks are about the most reliable companies on the stock market. As their global peers fell over they weathered the global financial crisis with barely a dent and year-in year-out they generate billions of dollars of profits for their shareholders.

Until now they've been largely immune from the disruption the internet has wrought on other industries, because no one else had the infrastructure to easily and cheaply match lenders and borrowers. But technology is enabling others to do this and banks will have to respond by changing their own business models, and potentially offering better rates.

Crowdfunding uses the internet to raise money for a project collecting small contributions from a large number of people. There is also peer-to-peer lending, which is eking out a niche in Australia. P2P lending, as it's known, uses the internet to cut banks out of the equation by matching borrowers with lenders and facilitating the transaction. The interest rates they offer can be more competitive than the banks' offering.

The amounts of money currently being lent are minuscule, but threaten the lucrative personal lending segment, which netted the banks A$1.2 billion in profits in 2011. Westpac, for one, is having a bet each way, investing A$5 million in P2P lender SocietyOne, saying at the time it was "exploring potential synergies".

Big technology companies such as Google and Apple are moving into the payments space, which the banks previously had to themselves thanks to their strength in credit cards and online money transfers.

We shouldn't overstate the immediate risk to banks from the internet. These financial institutions are behemoths with huge and well-established customer bases, and Australians rightly perceive them to be safe and secure, even if they don't like them very much.

The crowdfunders won't change the banks' market position in a hurry. But they will make life more difficult for them and force them to adapt.

Bigger problems

For the time being, however, the banks have bigger and more immediate problems to grapple with.

Share market investors wiped A$20 billion off the value of Australia's Big Four last week on fears the banking regulator will come down hard on them.

The banks have, it seems, been a little bit too enthusiastic in their support of Australia's runaway property boom. In an effort to contain any housing bubble, the Australian Prudential Regulation Authority, which oversees the banks, has told them they cannot increase their lending against property by more than 10 per cent a year.

But an analysis by Macquarie Group found the banks increased property lending by 10.4 per cent in the year to March - the highest level in seven years. National Australia Bank was the worst offender, increasing its loans at an annualised pace of 13.8 per cent in March.

The banks will have to curb their property lending growth or have it curbed for them, and this has got investors worried because property lending has driven the banks' earnings growth in the past few years. They are also facing the prospect of having to hold more capital (think security) for their loans, which will limit profits and dividends.

Three of the Big Four - ANZ, NAB and Westpac - report half-year profits this week

Together with the half-year profit the Commonwealth Bank has already announced, their combined cash profits for the half year are expected to top A$15 billion, up about 2 per cent on the year before. Much of that increase is due to property lending.

If regulators choke off this avenue of growth, the banks will have only themselves to blame for killing off the goose that laid the golden egg.

Christopher Niesche is a former editor of the Business Herald.