Peer-to-peer (P2P) lending has come a long way since its early days as a casual crowdfunding platform. Today, individual borrowers and small and medium-sized enterprises (SMEs) can access loans without the hassle of going through banks and lengthy financial assessments.
Still, P2P lending is a relatively new industry. Investors are worried about the security of their investments and the legitimacy of P2P platforms facilitating the loan transactions.
In Southeast Asia (SEA), countries like Singapore, Indonesia, and Thailand have set up a regulatory framework to provide legal protection to borrowers and investors and strengthen the growing P2P market. Collaboration between industry players and regulators will help to integrate and establish P2P lending as a serious contributor to the fintech industry.
Simply put, SMEs, investors and P2P platforms will stand to gain from having a supportive and unified regulatory framework.
The history of the P2P market, and why fintech lending regulations in SEA are necessary
The overall lack of clear P2P regulations has allowed many shady or irresponsible companies to operate for years. In the past, investors and borrowers viewed P2P lending and borrowing from non-bank institutions with a wary eye.
The frightening tales of debt collection without any protection for loan defaults or proper documentation made investors and borrowers question the legitimacy of P2P lending. Despite its setbacks, P2P lending has recently been gaining traction and becoming more attractive.
Most of it has to do with technological advancements coupled with social and business trends. The Internet has limited the role of the middleman across many industries. In online P2P lending, borrowers can skip past intermediaries—such as banks and credit unions—and seek financial aid directly from investors. This disintermediation process reduces costs and increases the efficiency of loan transactions.
P2P lending is especially helpful for SMEs who are looking for an alternative financing method to jumpstart their businesses. Investors can also obtain a high-interest return on their cash savings compared to a conventional bank savings account or certificate of deposit.
Yet, the question of financial security remains. Because of the momentum of P2P lending, more countries are doubling down on their regulatory policies to incorporate P2P platforms into their fintech ecosystem.
P2P lending consists of many of the key features inherent to a fintech innovation—it is changing the way people lend and borrow money, manage their investments, and handle payments across the globe. It is also one of the strongest drivers of fintech in SEA, and it is critical for promoting economic development in the region.
Outside the traditional banking system, P2P lending presents many strengths and opportunities for SMEs, investors, and the economy. With more cooperation among industry players, P2P lending can be a complementary addition for boosting the existing financial landscape.
The current state of Fintech lending regulations in SEA
The challenge with fintech lending regulation is figuring how to protect borrowers from unfair lending practices and safeguard investors’ money. A clear set of P2P regulations lets investors know that their money is well-protected from repayment delays or loan defaults.
As a leading financial hub, Singapore is quick to recognise the rise of P2P lending and establish its P2P regulations and legal framework. Platforms have to obtain a Capital Markets Services licence from the Monetary Authority of Singapore (MAS) before offering any P2P lending products or services.
P2P platforms must have a stable track record for the past five years or more, and satisfy the base capital requirements. They also need to convince the MAS of their business model, future projections, and internal risk management and compliance systems.
To help investors make an informed decision, P2P platforms must issue necessary disclosure with the required information about SME and prospective debt, for accredited investors to determine whether to invest in SME financing. Licensed platforms are also required to publish their loan performance for the past three years, and they should disclose their due diligence checks on borrowers to reduce default risk.
P2P regulations in Singapore remain encouraging, and the MAS has been supportive in ensuring that all parties—SMEs, investors, and platforms—benefit from the regulatory framework.
P2P platforms operating in Indonesia have to register with the Ministry of Communication and Information Technology (Kominfo) and Financial Services Authority (OJK).
With the OJK, P2P platforms have to make two registrations: the first is a general registration, and the second is a business licence application. P2P platforms also have to provide evidence that the company’s management and shareholders possess the requisite level of fintech qualifications and competence.
After the successful registration and commencement of business, P2P platforms must submit regular reports to the OJK on their loan activities, financial performance, and statements of user complaints. P2P platforms are also required to separate investor funds from their daily operations and use an independent escrow account to prevent platforms from having direct access to investor funds.
As P2P lending in Indonesia continues to expand with more foreign and domestic investors entering the market, investors should readily respond to the changing regulatory framework.
Because of the staggering rise in P2P loans—which is a 135% increase from a year earlier—, OJK is continually updating its checklist to block illegal platforms and prevent the misuse of data and malpractices in debt collection. A more robust regulatory framework will help investors and borrowers reap the benefits of P2P lending and avoid unwanted risks.
With the crowdfunding landscape growing in Thailand, the Bank of Thailand (BOT) has proposed an amendment to the Credit Information Business Act to attract businesses to act as loan intermediaries. The Securities and Exchange Commission (SEC) has also relaxed its debenture crowdfunding regulations to help SMEs gain more access to funds.
Previously, debenture issuers—the companies raising funds—had to meet all the requirements and formalities of issuances before pushing through with their offerings to investors. The updated SEC policy allows issuers to raise funds up to 80% of their targeted crowdfunding project values, without cancelling their offerings.
The policy signifies that the SEC is in touch with the current business environment and has embraced crowdfunding as a leap forward in closing the gap in SME financing. On top of its first set of P2P regulations, BOT has initiated a regulatory sandbox to test its risk management and consumer protection guidelines and promote fintech innovations within the country.
As of June 2020, the State Bank of Vietnam (SBV) released a draft decree on the regulatory sandbox to spur fintech-related activities. The sandbox program allows startups to promote their fintech models and solutions within a limited scope and under regulators’ supervision.
If all goes well, the SBV will request the Prime Minister to certify the completion of the sandbox program, which will serve as the groundwork for future fintech services. Investors can breathe a sigh of relief and expect clearer official guidelines about investing their money with P2P platforms. There will be significant progress in the Vietnamese fintech industry in years to come, and at the heart of it is the development in P2P lending regulations and consumer protection.
An outlook of P2P and its regulations in SEA
The much-discussed global trade financing gap—amounting to S$1.5 trillion—reveals the lack of access that SMEs have to financial funding. There are currently more than 70 million SMEs in SEA, accounting for 89% to 99% of all businesses establishments and 30% to 53% of each countries’ economic growth.
The progress of P2P lending has enabled SMEs to kickstart and sustain their business aspirations when banks would have otherwise rejected their loan qualifications on the usual perceptions of risk and collateral. P2P lending has also provided investors with an alternative asset class to obtain high returns with more control and flexibility.
But for too long, the market has gone unregulated, resulting in extended damage to businesses and reputational harm to P2P platforms as a whole. As a way forward, platforms can participate in more regulatory programs to grow the P2P lending market and strengthen its legitimacy as a viable asset class.
More regulations equal a healthier, stronger industry
A unified regulatory framework among P2P platforms, banks, and regulatory bodies will serve to transform the fintech industry. P2P platforms that sign on quickly will lead by example to the rest of the industry, lifting its overall reputation.
Investors and borrowers should welcome the new changes to the P2P lending market instead of fretting about the changes in operations. Regulations protect investors from loan defaults and give borrowers more power to contest unfair or exploitative lending practices. In the long run, P2P platforms can help SMEs build a reliable credit record for bigger loans and present loan interest returns as an attractive asset class for investors to diversify their portfolio.
Lastly, the lending platforms themselves will enjoy more respect and inclusion among other stakeholders in the fintech industry. A robust, regulated P2P market with legal protection will allow all stakeholders within the fintech ecosystem to benefit.
Jayanta Roy Group Head, Credit, Compliance & Collections at Validus. With over 30 years of SME banking experience at Citibank, DBS, Bank Danamon, Bank BTPN, Jayanta has held key roles in various functions such as business development, credit and risk, collections, and process redesigning. At Validus, Jayanta plays an instrumental role in helping to pivot Validus Singapore and drive financial inclusion for the unbanked or underbanked SMEs.