18. June 2019
P2P Lending and Challenger Banks: Emerging Fintech Trends in Southeast Asia
Global FinTech is a fast-paced, rapidly evolving industry and nowhere more so than in Southeast Asia and the ASEAN countries. The speed of change is being heralded as a boon for individuals, small-scale commerce, and big business alike with the sector reaching a predicted value of $72 billion USD globally by 2020.
In 2017, the World Bank reported that globally, 1.7 billion adults did not have access to banking, and in ASEAN countries the numbers reflect higher trends. In 2016, KPMG cited 73% of adults across the region as not having access to financial services with some countries, such as Cambodia, even higher at 95%.
Major changes in the FinTech industry have the potential to radically change and reduce these figures through developments such as AI, blockchain, and the rise in growth and accessibility in the digital banking markets. Peer-to-peer, or P2P lending and Challenger Banks are two changes that promise to revolutionise the personal banking experience for the region’s inhabitants.
Broadly speaking, P2P lending is the capacity for one individual or company to provide financing to another through a website--an online financial marketplace--without the need for the traditional third-party, namely, well-known banks or credit unions.
Lending is automated by the website through which it is being brokered, and while these sites usually set interest rates and the terms of the loan, there is often the possibility for negotiation. This, of course, is dependent on the credit history of the applicant and the risk level that the lender and site believe to be acceptable.
Recent changes in banking licensing standards have given individuals and small businesses opportunities for expansion where previously their growth was limited by their lack of traditional concepts of credit-worthiness by all-too-often risk-averse institutions.
Globally, there have also been new developments in certain P2P operations; for example, brokering links between applicants and lenders for very specific circumstances—such as connecting patients with doctors who offer financing programmes—providing both parties with financial flexibility and confidence.
The P2P lending model is proving extremely popular in Southeast Asia, with 39 million small to medium enterprises—51% of the SME sector—gaining access to finance that was previously unavailable to them. The lack of traditional banking trappings and costly overheads, such as managing physical branches, personnel, and the availability of current accounts, allows the P2P lender to offer the applicant much more competitive interest rates than traditional financial institutions demand.
CapitalBay is one such P2P-lending platform. Based in Malaysia and composed of a multi-bank supply chain, CapitalBay has recently received approval from the Securities Commission (SC) Malaysia to operate P2P lending.
CapitalBay specialises in financial solutions for SMEs by enabling and increasing cash flow management for B2B buyers and allowing them to pay suppliers first and sell their invoices for cash. Since its P2P lending commenced in the 4th quarter of 2017, CapitalBay has financed in excess of 1,300 B2B transactions worth more than RM75 million, or almost $18 million USD.
Legislation for the sector is paramount, according to Ajit Raikar Co-founder and CEO of Validus Capital. Providing the necessary safeguards to ensure P2P’s current growth trajectory and its longevity will also ensure that the Southeast Asian sector will not have to deal with the crisis that China did in June 2018--a crisis wherein fraud and major financial losses occurred, in part, due to the absence of a solid, legal, governing framework.
Challenger banks are non-traditional organisations known as Neo Banks. They are licensed to provide financial services to individuals and businesses, but, as with P2P, minus a physical bricks-and-mortar branch.
These Neo Banks may well be individually-backed startups; however, in the Asia-Pacific region this is not usually the case. It is the norm for these challenger banks to be backed by telcos, large tech outfits, or by traditional banks.
Singapore-based startup YouTrip is a specific example of a challenger bank in its format as a ‘payment services company.’ YouTrip has recently received $25.5 million USD from venture capital firms, most notably Insignia Ventures Partners and other unnamed private investment entities.
YouTrip operates a multi-currency payment card which the customer can ‘top up’ via the app and then use across 150 currencies and 30 million MasterCard merchants worldwide.
Rolled out across Indonesia in 2017, Digibank by DBS is another case in point. The money behind Digibank comes from its parent, DBS, a Singapore-based financial institution, but the provisions it offers to customers are wholly different.
Digibank uses a whole suite of new technology to provide services to its customers. From AI-led customer service to biometrics reading to soft-token security, Digibank ensures that the need for a physical branch has been replaced by the need for a smartphone.
After its soft launch, PT DBS Bank Indonesia Head of Digital Banking, Leonardo Koesmanto, advised that Digibank had 13,000 users and stressed the company’s aim to obtain 3.5 million users within five years.
As with P2P lending, legislation and licensing for these Neo Banks is a consideration that, as yet, has not reached maturation. Hong Kong has been leading the field with the Hong Kong Monetary Authority (HKMA) issuing virtual banking licences since 2018, with all other regions expected to follow suit.
One thing is certain, now more than any other time in history, banking as we know it has the potential to be more inclusive through the development and use of technology. Currently, the biggest challenge appears to be in creating a regulatory structure which can support this burgeoning sector without inhibiting its capacity for positive regional and global growth. A safe and transparent market for borrowers and lenders alike will ultimately ensure the longevity of this fast-moving industry.