What Awaits in Peer-To-Peer Lending?

Peer to peer lending is one of fintech’s sectors which probably gets the most attention. Why? It’s because of the billions of dollars of loans that have been disbursed on these platforms mainly in the US, UK, and China over the last few years.

The sector has grown so quickly and extended its influence around the world. In Malaysia for example, an overwhelming response was received by the Securities Commission (SC) coming from applicants wanting to operate such platforms. It is estimated that by the end of the year, the licenses will be granted and given out.

Generally, the P2P lending is separate from the banking system. That being said, with the speed at which it is growing, skeptics are beginning to doubt and ask questions as to whether P2P lending will create a new class of debt that could spiral out of control and influence the whole financial system.

First and foremost, you should know what exactly is P2P lending, what’s the reason for its fast growth in those markets and why are regulators in countries like Malaysia making a licensing system for it by way of regulation?

P2P lending are companies who normally run platforms to match small businesses who are looking for potential investors seeking a return. The idea has been working well overall in the US and the UK and it’s around for 5 years now.

In China, P2P lending has boomed with some consequences. But still, with an enormous amount of USD$150billion, the size of P2P lending in China topped by the end of last year according to some reports. Whereas in the US, critics focus on the Lending Club incident that soiled the image of P2P although the situation with that company is likely to be a specific case. It only shows the necessity for more regulation over the industry. This may also be part of the reason why the SC in Malaysia is taking that kind of approach.

Another question concerning P2P lending is: why would small companies choose this platform to raise money when banks would be the evident choice to seek a loan from?

Small companies choose these platforms for the simple reason that they are able to provide a much better customer support to the borrowers. It may be in the form of quicker approval time, less red tape, and in many instances, lending when banks would not. This also indicates that they are taking on higher risk loans and may suffer on a higher bad debt. This may be true but for now, interestingly, what’s happening is the opposite.

A lot of these platforms (some of which are public listed companies and hence are unlikely to be fudging their numbers) has little to none reported bad debt for the past four to five years of their operations. However, it may still be in its early days and that bad debt will soon pile up and crash into the system.

As an acknowledgment of these platforms, through the use of technology, they have achieved some remarkable inroads into the financing market. Incidentally, P2P platforms also offer micro-financing to individuals as well as really small fruit seller type business people.

The World Bank has noticed and praised fintech innovations for making financial services available to the two billion unbanked population in the world. Let us return to the issue of the credit analysis by fintech lenders, by using proprietary algorithms, these companies are able to carry out some serious levels of data analysis to credit score borrowers.

To numerous textbook credit evaluators, these methods can be viewed as a violation. But then again, this could be the uber moment for outdated credit analysts.

Only time can tell whether P2P lenders will prosper or collapse. Although in Malaysia, one hurdle it’s facing is the lack of implementation of bankruptcy laws or at least the insight of that. P2P operators may have a hard time on finding and convincing lenders who are willing to join due to the fear of losing their money to dishonest individuals scheming up wonderful business plans only with the goal to take the money and vanish. Nonetheless, the market is likely to figure itself out, so P2P lending is undoubtedly a space to watch.

Datuk Muhammad Ibrahim, governor of Bank Negara, said in his recent speech in the US: “disruptive technologies are gradually re-defining the financial landscape. A decade ago, a proposition of P2P lending would be met with skepticism. At present, fintech companies are prominent competitors to our banks and have caused the re-evaluation of our financial system.”

Here in the UK, the FCA (UK regulator) have made great strides and progress and are considered the leaders with regards to regulating peer to peer lending, treating customers fairly where the likes of China, Malaysia and India will take note.