Here is everything you need to know about alternative loans in Asia
In the old days, if a big bank rejected your loan application, you were out of luck. Today, technologically advanced companies are taking over, offering lending options outside the purview of traditional banks. In the US and UK, companies like Lending Club, Prosper and Earnest have led the way over the past 10 years in the brand new alternative lending space. But today, the global phenomenon of alternative loans is experiencing particularly explosive growth in a regional market: Asia.
Over the past 5-10 years, China, India and Southeast Asia have moved from a money-based society to one where mobile payments are commonplace, avoiding the adoption of credit cards, savings accounts, and other common consumer financial products in Western countries. The result: a population accustomed to smartphones but still largely unbanked, without the necessary credit history to access traditional loans to small businesses or individuals. It is a market of choice for alternative lenders, who typically use alternative means of assessing creditworthiness, forgoing traditional credit ratings altogether.
Below is our attempt at a simple, high-level guide to alternative lending in China, India, and SEA today, starting with a taxonomy of the different types of lenders.
Types of alternative lenders
Alternative loans come in many forms, including exotic ones like bill trading, equity-based crowdfunding, and market mortgage loans. For the sake of simplicity, in this article we will only discuss the two main types: peer-to-peer (P2P) lending and balance sheet lending.
In P2P loans, companies simply provide a market for non-bank investors to lend their money to borrowers. In these models, companies typically perform routine risk analysis on borrowers to ensure a certain level of quality, but theoretically the risk lies with the lender, not the business, protecting them from the risk. In contrast, balance sheet lenders offer their own capital rather than that of an investor. While this is closer to what traditional banks do, it differs in that loans from alternative lenders are generally unsecured, meaning the borrower does not offer any collateral; as mentioned above, alternative lenders of all stripes tend not to rely on traditional credit reports, the simple reason being that accurate credit scores are still scarce in South East Asia.
P2P lenders and balance sheet lenders can be further subdivided based on who they lend to (businesses, individuals, or both) and whether they specialize in a certain type of loan, i.e. payday loans or loans. automobiles. Here is a brief taxonomy of the many types of alternative lenders currently operating in both Asia and the West.
|Type||Subtype||Examples (Asia)||Examples (United States and Europe)|
|P2P loan||Businesses and consumers||ZhaoCaiBao (Alibaba), Lufax (China), i-lend (India), LenDenClub (India), LendBox (India), Faircent (India)||LendingClub (United States), Prosper (US), CircleBack (US)|
|Business||Manéo (Japan), Finance companies (Singapore / Indonesia), CapitalMatch (Singapore), MoolahSense (Singapore)||Funding Circle (UK, US), StreetShares (US), Able Lending (US)|
|General consumer||Crowdo (Malaysia), Simplex (Philippines), Loanvi (Vietnam), Taralite (Indonesia)||Arrived (United States), SoFi (United States), PeerForm (United States), Zopa (UK), RateSetter (UK / AU), AuxMoney (GE)|
|Balance sheet loans||General consumer||WeBank / Weilidai (Tencent), MyBank (Alibaba), Jinrong (Baidu), CASHe (India), EarlySalary (India)||Uncle Buck (UK)|
|Point of sale||Kredivo (Indonesia), Paymax (China), ZestMoney (India)||Affirm (United States)|
|Specific market||Buddy (India; students), Taralite (Indonesia; online merchants), EthisKapital (Islamic financing)||Earnest (US; student funding), SoFi (US; student funding)|
|Business||UangTeman (Indonesia)||OnDeck (US), Kabbage (US)|
To see the incredible potential of alternative loans to change the financial landscape, look no further than China. According to Bloomberg, China alone has 2,200 P2P lenders, and its P2P lending market is valued at a estimated at $ 100 billion.
Historically, Chinese state banks have been reluctant to extend credit to individuals or small businesses. So when P2P lenders started to appear, they immediately found a market; in fact, P2P loans exceeded 2,800 billion yuan ($ 400 billion) in 2016, Epoch Times reports.
Chinese P2P companies suffered a setback in early 2016 when it turned out that one of the industry’s largest P2P lenders, Ezubao, turned out to be a ponzi scheme. Since then, the Chinese government has started P2P market regulation. Investors see it as the end of the risky “Wild West” era of P2P lending and the start of something more stable.
Balance sheet loans are also thriving in China. Tech giants Alibaba, Tencent, and Baidu each offer unsecured consumer loans through their respective online banks, MYbank, WeBank, and Jinrong. Chinese tech giants have actively sought synergies between different divisions of their sprawling companies. For example, Sesame Credit, Alibaba’s alternative credit scoring program, examines the frequency and cost of a customer’s purchases on Alibaba’s Alipay mobile payment platform to determine their creditworthiness.
With deep pockets and an existing mobile payment infrastructure, these companies dominate the Chinese non-P2P alternative lending market, to the point where smaller players find it difficult to enter. Combined with the government crackdown on P2P, this trend of domination by a few companies makes the Chinese alternative lending market less attractive as an investment than it used to be.
Meanwhile, the alternative loan market in India is at a much earlier stage. Giant tech companies are not yet dominating the scene, so the on-balance sheet loan landscape includes a large number of smaller specialists like EarlySalary (payday loans), ZestMoney (point of sale) and Buddy (targeting students). There is only around 30 P2P lenders in the country, which is surprising for a country where nearly 40% of the population is not banked, and therefore without access to traditional loans. The problem may be supply rather than demand: Compared to China, India just doesn’t have as many newly created millionaires looking for places to invest their money.
Nonetheless, Indian regulators are bracing for potentially dramatic growth in the P2P industry. In order to avoid the fraudulent setbacks that some Chinese consumers have suffered, the Reserve Bank of India is already P2P market regulation. Venture capitalists see these regulations as a positive development that makes investing in Indian P2P startups less risky. Additionally, regulations are unlikely to affect India’s most established P2P startups, like Faircent and i-Lend, which have been self-regulating from the start. In fact, Faircent claims government regulations have made their organization more popular than before. i-Lend, which has more than 3,000 lenders and 10,000 borrowers, predicts similar growth – founder Shankar Vaddadi estimates P2P lending in India could reach 600 billion rupees (8.8 billion USD) in the coming years, but could not say how much is currently on the market.
P2P interest rates may be higher than traditional loans, but in India’s predominantly cash economy, they are the only option for many. For people historically neglected by traditional banks, the popularity of P2P loans in India continues to increase.
South East Asia
Southeast Asia has one of the fastest growing economies in the world, but the small and medium-sized enterprises (SMEs) that make it up have more limited access to financial credit than the world average. Therefore, even though the region’s alternative lending landscape is not yet huge, it is likely that the market will take off there as it did in China and India, bringing with it investment opportunities. .
In Singapore, the region’s financial center, the main players in alternative finance in Singapore are peer-to-company (P2C) lenders: specialized P2P lenders who only offer loans to SMEs. Market leader Capital Match was founded in 2014, but claims it has already disbursed over S $ 32 million (US $ 22.5 million) in loans. Last summer, competing finance companies said they paid $ 8.7 million to date on 96 loans. The two companies are looking to diversify: Funding Societies is expanding its services to Malaysia and Indonesia, while CapitalMatch is trying to provide secured and unsecured loans.
Malaysia is doing its part to meet P2P companies like Funding Societies in the middle, having recently updated its financial guidelines to include P2P loans. Thailand followed suit, issuing a P2P lending regulation consultation paper last fall. Southeast Asian countries are sending the message that they are ready for P2P, so investors should take note. It is not only consumers and investors who are interested in the increase in alternative loans in ASE, but also the governments of these countries.
However, with so many different governments involved, SEA poses a particular risk of over-regulation. Already, P2P lenders here have to take steps that their competitors in other regions don’t. For example, finance companies need to channel their funds by an escrow agency registered with the Monetary Authority of Singapore (MAS) to comply with Singapore crowdfunding regulations.
Since alternative lending has seen a huge expansion in China and looks set to expand in India, there is also a huge opportunity to invest in alternative lending startups in Southeast Asia. Alternative lending may be a new concept, but it is a concept that is enjoying rapid and enthusiastic adoption across Asia.
With contributions from Lauren Orsini and Reina Gattuso from The hippopotamus thinks.