Peer-to-peer lending is becoming a formidable asset class among those with an appetite for alternative investments. Personal Wealth looks at the burgeoning industry.
Given the higher risk of default, P2P lending platforms have put up numerous safeguards to protect the investor. For Capital Match, the following measures have been put in place.
“If a default were to happen, we would employ a debt collection agency to attempt to collect the debt from the borrower. There are other measures in place. The directors of the borrower have to provide personal guarantees so that the debt can be collected from both the company and its directors,” says Kuznicki.
“If the debt collection is unsuccessful, we would then advise lenders if they should start legal action against the borrower. The cost of debt collection is on us, but the cost of subsequent [if any] legal action has to be borne by the lenders. In the future, we will introduce secured loans to provide better security to lenders.”
On the company’s website, it states that a late payment fee of 1% on the outstanding principal is charged to the borrower. It also “charges a late payment interest of 0.1% per day on the outstanding principal payable to lenders for each day the payment is late until it is settled”.
In the UK, numerous measures have been taken to reduce the risk of lending to subprime borrowers. For instance, Zopa’s website states that it has a Safeguard Trust to protect investors. Firstly, it reassures investors that they do not need to take action if a borrower misses a payment as Zopa will follow up with the borrowers.
If the loan is four months in arrears, the contracts “are assigned to Safeguard to claim for the outstanding loan amount. Safeguard usually pays the claim, but does reserve the right not to. In this case, it will seek to recover the amounts owed on your behalf”.
Due to its infancy, at least within Southeast Asia, P2P lending remains largely unregulated. Capital Match is under the purview of two regulatory bodies in the island republic — the Monetary Authority of Singapore and the Ministry of Law.
“However, currently there are no specific regulations for P2P lending, though we expect regulations to emerge over time,” says Kuznicki.
Besides government regulations, other industry-related bodies may emerge to provide their own guidelines for the burgeoning industry. The Peer-to-Peer Finance Association in the UK, which seeks to represent member P2P platforms, among others, have provided a set of operating principles for members to comply with.
These operating principles are essentially regulations to ensure the “orderly operation of peer-to-peer finance platforms”. More specifically, they cover areas such as the minimum operating capital requirements, appropriate credit and affordability assessment as well as appropriate anti-money laundering and anti-fraud measures, among others.
Complementing the banking industry
The very notion of peer-to-peer (P2P) lending appears to place such platforms as competitors of banks as they vie for the attention of the same lending and borrowing audience. But Pawel Kuznicki, CEO of Singapore-based Capital Match, disagrees. He believes that the future will be one where both traditional banks and P2P lending firms co-exist and serve the market segment they are best suited for.
“P2P lending can complement traditional banks. Most of our customers have difficulties getting bank loans, thus they are looking for an alternative source of funding,” he says.
“We believe there will be space for both banks and P2P lending companies. P2P lending emerged because banks were not serving a large segment of customers. We believe that in the next 5 to 10 years, SMEs will be to a large extent served by P2P lending platforms, whereas medium to large companies and multinational corporations will be served by the banks.”
While Capital Match’s platform is currently limited to Singapore residents with a local bank account, the company plans to expand its offering to other countries in the near future, including Malaysia.
“As soon as we implement a trust account, we will be able to accept investors globally. They would be vetted first by the trust company we are working with and if approved, they will be able to transfer funds to the trust account and start investing.”
The peer-to-peer (P2P) lending concept sounds very much like the crowdfunding concept. However, they aren’t exactly the same. Although both use online platforms for fundraising, crowdfunding offers either equity or rewards in return for capital, whereas P2P lending centres around issuing debt and receiving regular repayments of principal, which is pledged for at a defined interest rate.
Capital Match CEO Pawel Kuznicki explains that while the underlying concept involves the idea of businesses attaining funds by sourcing funds from a larger pool of unrelated investors, there are differences.
“The primary difference between crowdfunding and P2P lending is that the former is where investors focus on receiving equity in exchange for capital, while the latter focuses on issuing debt and receiving regular repayments of principal and interest. They have different risk-return profiles and serve a different purpose to SMEs,” he says.
“Investment in equities rests upon an expectation of high growth from the company that will result in better valuations and capital gains for the investor. Lending has a limited upside (limited by the agreed interest rate), but it gives better protection to the investor (creditor) and does not require an impressive growth of the company, but rather stable cash flows [to cover debt repayments].”
This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on July 13 - 19, 2015.