P2P lending takes off in Asia as startups fill banking shortfalls06 April, 2016
One-year-old startup Monexo operates out of a windowless office in the hip, renovated basement of an old Hong Kong bank building. There, the company channels credit in cyberspace.
The peer-to-peer lending firm is small, with a staff of fewer than 10. But in this era of technology influx that can change everything banks do, speed may matter more than size.
"Metaphorically, what I would say is, a bank like Citi is like a huge ship, think of a turbo ship, it takes a lot of time to make a turn. Today, I am on a speedboat, I can go very fast, I can turn really fast," Monexo CEO Mukesh Bubna, who worked almost two decades at Asian units of Citigroup Inc., said in an interview.
"That is the difference. When a big wave comes, we can handle it. What we have done in five to six months would take a couple of years in a bank."
Monexo is among P2P lending platform operators sprouting up across Asia, which is years behind the west in proliferation of the business.
The rise of the industry, on track to generate US$1 trillion of loans globally by 2025 according to Foundation Capital, is part of an accelerating evolution of the way banking and other financial services are provided as advancement in financial technology, or fintech, spurs innovation. Asia as a whole has been slower than Europe and the U.S. in the broader trend, too, because of obstacles ranging from discomfort with digital services to a lack of regulatory support.
Now, P2P lending, also known as marketplace lending, is finally catching on in Asia-Pacific. China is at the forefront of the boom, with more than 2,500 sites in operation at the end of 2015; more than double the previous year's number. P2P loans to consumers in China jumped to US$52.44 billion in 2015 from US$14.30 billion in the previous year, while to businesses, the total surged to US$39.63 billion from US$8.04 billion, according to the Asia-Pacific Alternative Finance Benchmarking report, written by a team of academic researchers in collaboration with KPMG.
Estimates vary, but such figures make China the world's largest market for P2P lending. The country, home to e-commerce giants such as Alibaba, which now offers financial services, has been a fertile ground for fintech.
"China is a big place where innovation has been created. They take the idea from this and they improved it so much that it becomes better than the world. That's why they are developing these new banking solutions," Bubna said.
On the demand side, small and medium-sized enterprises facing a lack of financing options are fueling growth.
"On the volume, Asia tends to have much more potential than Europe, because of the size of the SME sector and their lack of financing has been evident for the last decade," Janos Barberis, founder of SuperCharger, a Hong Kong-based accelerator for fintech firms, said in an interview. "There is a real need of solving the SME financing."
For individuals, lending rates as high as 20% in a mature market like Hong Kong can make P2P loans a good investment option, especially when interest costs globally are as low as now. Rates at those levels can still be more affordable for borrowers than conventional consumer finance products, such as credit card loans. Also for those with weak credit histories, P2P lending sites could be an easier, and quicker, option to raise funds. All of that is possible because online firms are more flexible than banks and have lower operating costs.
P2P lending, however, is still at an early stage of development in advanced Asia-Pacific economies, such as Hong Kong, Singapore and Australia, partly because they have well-established fundraising avenues for companies.
The industry is "still very nascent in mature Asian countries where there already exist developed financial markets for debt or equity raising," said Jan Bellens, Asia-Pacific banking and capital markets leader at Ernst & Young.
Early stage in developed countries
In Hong Kong, P2P consumer lending sites emerged only in 2014 and by the end of the following year, the sector expanded to handle US$5.5 million of loans annually; still a fraction of the volumes in China, according to the Asia-Pacific Alternative Finance Benchmarking report, published in March.
But in those markets, too, the industry is growing fast, as ventures introduce new services that address inefficiencies in traditional banking. In Australia, for instance, P2P consumer loans jumped to more than US$43 million in 2015 from about US$2 million two years earlier.
That is the market where career banker Daniel Foggo saw a future for P2P lending. With years of investment banking experience under his belt, he is now CEO of the Australian unit of U.K.-based P2P lending firm RateSetter.
"I met RateSetter in the middle of 2012. They were quite a small company at that stage and they explained their business model to me and their success to date. I suggested to them that Australia would be a very good market for them to launch a partnership with me," Foggo said in an interview.
He said, citing a report from Morgan Stanley, that P2P lending in Australia could one day become a US$14 billion market by annual loan volume.
RateSetter alone is aiming for an almost seven-fold jump in loan origination in the country to A$100 million in 2016 from A$15 million in its first year in 2014. That is still far short of the A$1 billion generated by its parent company in the U.K., but Foggo is upbeat.
"So if we were achieving A$1 billion a year in five years' time or four and a bit years' time, we would describe that as success," he said.
Partnerships with banks
Such optimism stems from belief in potential for technology, which can cut costs for many aspects of traditional banking operations, from printing checks to maintaining ATMs. Because of the advantage, P2P lending firms or fintech ventures can be a formidable threat to conventional financial firms. Some banks are trying to turn that into an opportunity by forging partnerships with the new breed of companies.
Monexo in fact is a beneficiary of that effort. In August 2015, the company was selected by DBS Accelerator, an initiative between DBS Bank (Hong Kong) Ltd., a unit of top Singaporean banking group DBS Group Holdings Ltd., and Nest, a Hong Kong-based startup incubator, aimed at fostering fintech startups.
"Fintechs play an important role in the ecosystem and we are collaborating with them to incorporate their offerings into our strategy to make banking simpler, smarter and faster for our customers," a DBS spokeswoman said. "We recognize that fintechs are disrupting financial services but DBS also sees opportunities to work with them. We have been investing in building our own digital banking capabilities and have changed our work processes to become more agile."
Thanks to the tie-up, Monexo is currently occupying a room in "The Vault," a renovated 5,000-square foot space set up in the basement of the Overseas Trust Bank building in Hong Kong's Wan Chai business district. And with the support, Monexo is looking to expand to Singapore.
"There are a lot of discussions between DBS and us. The bank is very big and they have a lot of departments. Each of them we have had conversation with we let them know what we do. This is what I would say is like a process of where we build trust between these two organizations," Bubna said.
Dark side of growth
But it is not all rosy for the P2P lending industry. For one thing, increasing competition is putting pressure on margins.
"[With] intensified competition and thinning margins, lackluster economic growth and liquidity shortages, the exponential growth that these platforms have been enjoying is not sustainable," Bellens said.
Firms should think about new growth strategies, such as enhancing origination capabilities in emerging markets, diversifying funding bases and mitigating risks by obtaining permanent capital through the use of listed investment trusts, Bellens said.
As the sector becomes more crowded to the detriment of profitability, there could be mergers among platform operators, while some may turn to banks for investment.
At the same time, the industry may receive greater scrutiny from regulators, as they grow increasingly wary about risks to consumers after seeing P2P lending frauds. In China, after Ezubo was found to have misused customer funds, authorities proposed several restrictions on P2P sites.
"Such developments raise questions over the viability of the lucrative online finance industry," Bellens said.
Yet, markets like Hong Kong still hold a lot of promise for entrepreneurs.
"In Hong Kong, it's still young," Bubna said.
As of March 30, US$1 was equivalent to A$1.30.
Author: Susanna Tai and Edward Lane and Janna Estares