The financial services industry has taken huge strides in the last 20-odd years, with path-breaking innovations in the financial system such as the advent of automated teller machines (ATMs), credit cards, online banking, mobile banking and sophisticated loan and deposit products. The speed of innovation has been unprecedented.
One new offering that has developed more recently is peer-to-peer (P2P) lending, also known as marketplace lending or crowdfunding. The concept seeks to leverage on the existing gaps in the lending system and serve the underbanked borrower segment while at the same time providing excellent returns to the lenders, who are usually retail investors with excess cash.
Since P2P lending is primarily an online proposition, the inherent costs and overheads are low. P2B (peer-to-business) lending seeks to use this concept to fund businesses which don’t have access to bank funding. Personal loans and loans to small businesses are the two most common lending products within the P2P framework.
The roots of P2P lending lie in the UK and US and go back to 2005-06, with lenders such as Zopa (the first P2P lender), Prosper, Lending Club and Ondeck being the pioneers. Thereafter came other big players like Funding Circle (UK) and Society One (Australia). Over the years, however, Asia has overtaken the US, primarily led by China. In 2015, P2P lenders globally originated loans worth US$64bn, with China contributing more than half of the total. Major lenders in Asia include:
China – Lufax, Dianrong, Yirendai
India – Faircent, Lenden Club, i2ifunding
Southeast Asia – Funding Societies, Modalku
Hong Kong – WeLab
Japan – Maneo
Unlike in the US and UK as well as some other developed markets, where P2P is predominantly an online model, a majority of the P2P lenders in Asia have a mix of online and offline models. Lack of data availability, low internet penetration, manual processes and regulatory challenges in emerging Asian economies are some of the challenges that inhibit growth of completely automated online models.
In the last few years, a new set of completely online P2P lenders has emerged. They use behavioural data from social media, acquire data through partnerships, and also use innovative technology-based credit scoring methods for giving out faster and lower-cost loans to underserved segments. One such example is Paipaidai in China which uses the online trading history of the borrower to underwrite loans.
Another recent phenomenon is the advent of cross-border P2P lending. Crowdcredit funds borrowers in emerging markets including Europe and Latin America through retail investors based in Japan.
The P2P segment has also attracted a significant amount of venture capital (VC) activity in recent times, as well as other funding, with some of the most notable funding for P2P lending companies in the Asian context including:
Lufax: Raised about US$19bn in their Series B round
Dianrong: Raised about US$1bn in their Series C round
WeLab: Raised U$160m in their Series B round
Funding Societies: Raised about US$7m in their Series A round
The key growth drivers for P2P lending in Asia include:
- Rapidly-developing and high-growth Asian economies with large but credit-worthy underbanked populations
- Huge funding gaps where banks are not able to lend due to structural inefficiencies
- The availability of a large pool of retail investors with excess cash
- Increasing internet and mobile phone penetration that complements the online product proposition and reach
- Fintech-led fast online processes that help reduce costs and overheads while aiding customer adoption
- Support from regulators and government bodies towards inclusive financial growth
- According to Statista, P2P lending globally is expected to cross US$1 trillion in loan origination by 2050. Asia, given its unique positioning, should account for a significant portion of that total.