LendingClub (NYSE:LC) recently filed an 8-K with the US Securities and Exchange Commission (SEC) indicating its intent to stop offering retail notes by the end of the year. The leading marketplace lender in the US started as a peer to peer lender but over the years it has raised most of its capital via institutional money. Now it is exiting the retail sector.
It’s possible that lenders in other countries like Indonesia may also begin excluding retail investors from certain offers. The Financial Services Authority (OJK) in Indonesia has created several guidelines for technology-based lending platforms. As reported by the Jakarta Post, regulation No. 77/2016 (on tech based capital lending services) allows Fintech lenders to be individuals or legal entities. This is like an umbrella regulation that aims to protect retail and institutional clients who are active on local Fintech lending platforms.
The OJK, which is Indonesia’s financial regulator, has taken several measures to protect local investors and traders from illegal lending activities. The OJK recently revealed that its Investment Alert Task Force has shut down 2,840 Fintech companies that were operating illegally in just the past two years.
Despite these challenges, the Fintech lending ecosystem in Indonesia continues to grow steadily. OJK’s statistics from August 2020 reveal that the ongoing development of Fintech lending shows a total of 669,580 lender entities. This represents an increase of over 26% when compared to the activity from last year – which indicates that Indonesians might still be comfortable in making substantial investments (which can be good for the economy during these challenging times).
Indonesia’s retail business may also be growing, but this might not lead to sizable profits. Fintech companies have to provide adequate resources to manage the different risks associated with retail clients. Companies may be responsible for improving the financial literacy of retail customers. They may have to provide comprehensive information and must also be able to effectively address customer complaints and disputes. Although Fintechs need to handle disputes for institutional clients, risk differences between these two investor types are quite different.
Another factor to consider is credit risk. The OJK revealed that the average rate of payment success 90 (TKB90) August 2020 was around 92%. The TKB90 notes that there needs to be an acceptable success rate of Fintech lending in meeting the debtor’s payment obligations to lenders within 3 months or 90 days from the specified due date.
As explained (and analyzed) in a blog post by the Jakarta Post, this means that (on average) there’s an 8.27% chance or possibility that the debtor won’t be able to pay back the loan amount. In these types of cases, the lender could risk losing their entire investment that was made through the platform. This could result in a major negative impact if it’s not addressed properly, especially if there are many retail investors that are active on the platform.
As explained by Yosea Iskanda, head of legal and corporate secretariat at Bank DBS Indonesia:
“One way to reduce this risk is to diversify the borrower pool, which is to spread the risks into several groups of debtors. However, it will be challenging for retail customers or individual lenders to have enough in their portfolio to properly deploy this form of risk mitigation. This is a problem that is not faced by institutional lenders, as they possess large capital to invest in.”
“Hopefully the economic situation will soon improve, following the various measures the government has implemented….so that the fintech lending industry will continue to grow and support Indonesia’s economic development.”