Fintech: First secondary market for P2P financing in Malaysia

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on August 3, 2020 - August 09, 2020.
Photo by Mohd Izwan Mohd Nazam/The Edge

Photo by Mohd Izwan Mohd Nazam/The Edge

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Peoplender Sdn Bhd, the operator of peer-to-peer (P2P) financing platform Fundaztic.com, launched the country’s first secondary market for P2P financing on July 20. It allows the platform’s investors to cash out from their existing investments or to buy more notes to enhance their returns, says CEO Kristine Ng.

“It is the perfect time [to launch the secondary market]. Some investors need emergency funds in these tough times while others are looking to invest more in this high-yielding asset class amid the low interest rate environment,” she says.

The secondary market is important for investors as the average tenure of the investment notes hosted on the platform is 24 months, which is longer than the average tenure of those offered on other platforms. That means investors will only get their principal back after two years.

Investors have been demanding greater liquidity since Fundaztic went live in 2017. This means their desire to buy or sell notes at a good price has been getting stronger, says Ng.

“The demand has been there for as long as I can remember. It is one of the questions that I have to deal with during our monthly investor talks. The secondary market should be able to solve part of [this lack of liquidity],” she adds.

The main purpose of the secondary market, however, is to encourage people to treat P2P financing as a long-term investment. Ng says many investors tend to allocate only a limited amount of money to the platform due to liquidity concerns. They are willing to take on liquidity risk in exchange for higher yields of about 11% to 15% over a relatively shorter period.

“But they stop putting in more money or reinvesting their returns after they reach a certain limit. This is not what we would like to see. We want them to stay invested or, at least, reinvest their returns over the long term to build a meaningful portfolio size that can provide them with good returns while helping the small and medium enterprises (SMEs) at the same time,” she says.

“We hope investors will feel more comfortable investing in P2P after the launch of the secondary market. We hope they will be willing to take on more risk and invest in the asset class for the long term.”

Fundaztic investors can now see the “Sec Mkt Buy” column on their dashboard. In that section, they will be able to check if there are any investment notes on sale.

Facilitating ‘meaningful trades’

While any investor can buy notes on the secondary market, only a selected group can see the “Sec Mkt Sell” column on their dashboard and be able to sell their notes on the secondary market, says Ng.

Investors have to meet several criteria before they can sell notes. This is to facilitate “meaningful trades” on the secondary market, she continues. “We want to ensure that people are selling their notes out of necessity, such as for emergency funds, and those who are buying are not trying to speculate.”

First, only investment notes where the funds raised have been disbursed and have a remaining tenure of more than three months can be sold. For instance, a term financing note with a tenure of 36 months can only be sold before the issuer makes its 33rd payment.

“These rules are set by the Securities Commission Malaysia. However, Fundaztic also has its own set of rules on top of those laid out by the regulator,” says Ng.

She adds that investors can only sell an investment note or a portfolio of notes that has a remaining principal of at least RM5,000. “We thought such a sum would be reasonable for those who need emergency funds for various purposes such as to pay for household expenses or their children’s education. An investor who wants to sell a note for RM50, for instance, will only be able to buy a few cups of coffee with that money, which is not for an emergency or a meaningful purpose.”

Also, investors can only sell notes whose issuers have been prompt in making payments. “Notes that have experienced late payment, even once, cannot be sold,” says Ng.

She explains that this rule is aimed at reducing investment risk for buyers on the secondary market and hopes that it will facilitate more trades. “We help the buyers by doing the first layer of screening, that is, ensuring that they only buy notes whose issuers have been making prompt payments. Then, it is up to the investors to decide whether, let’s say, six months of prompt payments are good enough for them, or whether they would prefer notes whose issuers have been making such payments for a longer period.

“When the timing is right, we will further liberalise the secondary market by introducing more types of notes with varying degrees of risk.”

The investment notes can be listed on the secondary market for up to 10 days. If they are not picked up during this time, they can only be relisted a month later, says Ng.

She adds that the selling price of a note or portfolio of notes can be set at 5% higher or lower than its remaining principal. “We think 5% is a plausible rate based on investor feedback.

“The platform also collects a fee of 1% for each completed trade. It is an additional revenue stream for us. More importantly, we want to discourage people from selling their notes after they earn, say, an interest of 1%. We do not want speculation to happen.”

Nevertheless, Ng does not expect much speculation to happen on the secondary market as P2P financing is a debt instrument. “Everything, including the returns and tenures of the investment notes, are provided up front. You may earn less, but you won’t get more,” she says.

“It is very different from buying shares, where you are buying into the performance of companies on a quarterly basis and the volatility can be very high. The rules and regulations we have in place should be enough to facilitate meaningful trading.”

General guidance for secondary market investors

Ng says investors who are comfortable investing in P2P financing should keep an eye on the secondary market as some attractive deals could arise during this Recovery Movement Control Order period. “Some investors may need emergency funds while others want to cash out and invest the money in the stock market.”

Also, some investors who have invested in a portfolio of notes and received interest over a period of time may have earned enough even before their notes reach maturity. “These investors may want to sell their notes to get back their principal earlier. They may even offer a slight discount to dispose of their notes,” she says.

Ng says investors who sell their notes on the secondary market can lower their selling price if they need to cash out quickly. Those who can afford to wait are able to price their notes at a premium.

She adds that investors can consider buying notes whose issuers have already completed half the total number of payments as these usually entail lower investment risk. For instance, a 24-month note whose issuer has already made the payment for the 13th month usually carries less risk than one whose issuer has only made five months’ worth of payments.

“Based on data provided by banks, businesses that have faithfully made payments in the first half of their loan tenure are most likely to pay off the remaining sum. The first half of the loan tenure is always the most volatile,” says Ng.

“This is partly why investment notes bought on the secondary market do not qualify for our Principal Protect [a programme where Peoplender guarantees investors their principal and cash holding]. The risk of investing in these notes is already lower.”

Stepping down as CEO

Kristine Ng, CEO of Peoplender Sdn Bhd, which operates peer-to-peer (P2P) financing platform Fundaztic.com, will be stepping down from her role on Aug 15. Fundaztic’s head of strategic initiatives, Calvin Foo, will be the acting CEO after her departure.

Launched in July 2017, Fundaztic has been one of the more active P2P financing platforms in the country, alongside Funding Societies Malaysia and B2B Finpal. According to Ng, the platform has funded the most small and medium enterprises (SMEs) among its peers.

The Securities Commission Malaysia’s (SC) data shows that there had been 2,231 successful P2P financing issuers as at June 30, of which 1,104 (49.48%) had raised funds via Fundaztic. “We have funded the greatest number of SMEs in the P2P ecosystem, even though we are not the largest in terms of total amount funded,” she says.

Ng, who turns 49 this year, has been the key figure behind Fundaztic’s growth. She especially takes pride in having designed the platform’s processes and automating a big part of its operations.

“I wrote and drew at least 80% of Fundaztic’s processes. That is why our investors and issuers can do almost everything on our website without human intervention,” says Ng.

For instance, investors can register with Fundaztic completely online. They can opt for the Smart Invest feature, which will help them invest automatically. They are also automatically eligible for the Principal Protect feature when they meet specific requirements. Meanwhile, SMEs that are interested in raising funds or restructuring their notes can make their applications online as well.

“I am passionate about designing processes. This is something that I have been doing since I worked at Citibank and Credit Guarantee Corp Malaysia Bhd (CGC),” says Ng.

Before joining Fundaztic as CEO, Ng was executive vice-president at CGC, responsible for its business development. Prior to that, she was vice-president at Citibank Bhd, in charge of driving cards acquisition via various marketing channels.

She left CGC in 2015 to join Peoplender Sdn Bhd. At the time, the company was not yet licensed by the SC to operate a P2P financing business.

“I took a leap of faith to join a start-up when the platform had not started operating yet. The guidelines for P2P operators were not even out yet. I thought to myself, ‘What if Fundaztic could not get a licence even when the guidelines came out?’ I would be without a job. Everything was uncertain then,” says Ng.

“But I am a risk-taker and am willing to try out new things in my life and career. I made the decision to join a start-up that is expected to operate in a whole new industry locally. I am used to dealing with uncertainties in my personal life. [Having said that] I always have my own reasons when I decide to take any risks.”

So, is she leaving Fundaztic for a new venture? And is the timing right for her, considering that we are in the middle of a pandemic?

Ng reassures investors that her leaving is based on personal reasons and not due to internal politics or operational challenges. In fact, she is confident that the start-up will continue to grow. “It will probably hit RM100 million (from RM84 million currently) in the amount disbursed to SMEs by the end of the year.”

In addition to launching a secondary market, the start-up introduced its face-recognition feature in July to onboard investors more quickly and seamlessly. “Most of the business processes have been automated. These processes would only need to be fine-tuned going forward. I have done my job in laying a solid foundation for the start-up,” says Ng.

She will remain a shareholder of Peoplender and is helping Fundaztic to set up business operations in Singapore. She has also personally invested in more than 700 notes on the platform.

While there is no “best time” to quit her job, Ng believes that it is a good time to do so. “Things are moving extremely slowly for most businesses out there due to the pandemic. So, it is a good time for me to take a break and test whether those processes can work well without my involvement,” she says.

“Also, Calvin — who will be the acting CEO — has been involved in designing and testing most of the processes. He will be monitoring and fine-tuning them.”

Ng would like to pursue some of her interests such as painting and making terrariums after leaving the company. “I am pretty good at making terrariums. Perhaps I can sell some of my work, although I would just give some to my close friends for free,” she says.

Ng is also interested in training for a marathon and may want to participate in some of the top events globally in the future. “I watched this exciting TV programme about an actor who started running and eventually did the run of his life at the Tokyo Marathon — one of the top five marathons in the world. He was overcome with emotion and was crying when he crossed the finishing line. I was inspired by his story,” she says.

“When my brother — who is a marathoner — found out, he knew I would not let the idea slip just like that. He gave me his old Garmin watch and provided some guidance on how I should train for a marathon. Running at something like the Tokyo Marathon, though extremely challenging, could be my next goal. Who knows?”

As for her next career adventure, Ng is passionate about the potential of digital banks, which are expected to transform the financial industry using cutting-edge technologies. After all, she has had the experience of working in both traditional financial institutions and a financial technology (fintech) start-up — an experience that not many people have.

“My time and career options have once again become flexible. Who knows whether I will jump on the next exciting bandwagon that comes my way?” Ng smiles.

Low default rate despite Covid-19

Kristine Ng, CEO of Peoplender Sdn Bhd, which operates peer-to-peer (P2P) financing platform Fundaztic.com, says its 12-month default rate stood at 3.6% on July 21 and that the default rate has been under control over the past few months.

She says an investment note is classified as a default when its issuer has been late in making payments for three consecutive months. “The July figure reflects the payments made from April to June. The Movement Control Order was implemented in mid-March.

“We expected the default rate to spike in July, but it did not. At 3.6%, it is still lower than our long-term projection of 5% to 8%.”

The low default rate is partly due to the platform’s rescheduling and restructuring initiative, where it allows some of its issuers to make payments of smaller sums over an extended period. “They pay one-third less than they normally do and the payment period is extended by four months. The interest rate remains the same,” says Ng.

“We have asked our investors to be understanding as these businesses have been experiencing immense pressure since the coronavirus outbreak and they have agreed to do so.”

However, it is hard to tell whether the default rate will rise going forward, she says. “Our default rate should hover at about the 4% level if the pandemic does not get worse from here. However, the rate could spike if there is a second wave of Covid-19 infections. It is really hard to project [the default rate].”

Ng is proud that most of the people who started investing with Fundaztic three years ago have earned an average return of about 13% per annum in effective interest rate terms, or a simple interest rate of about 7%.