Written By: Steven Winter – Corporate Finance
Peer-to-peer (P2P) lending is a fast-developing market. Its growth during the period 2016-20 is estimated in a report from Research and Markets titled “Global Peer-to-peer Lending Market 2016-2020” to be an annual rate of 53.06 percent. However, obtaining a clear view on this recent market is quite difficult as it is still not very transparent everywhere in the world, and it is also regulated differently (or not at all) in each country.
These online platforms are developing well in countries in which a wider gap of lenders (traditional banks generally) is evident. That is what Twino, Europe’s fastest growing peer-to-peer lending platform, has concluded from its analysis. And it created in May the first ever Alternative Lending Index (ALI) in conjunction with KPMG. The index is high (higher credit gap) when people in the country have a lower probability of getting a loan, or face more stringent loan-issuance criteria, and where the alternative-lending market can cover other inefficiencies in the traditional lending market. The Twino index found that the highest ranked countries for alternative lending in Europe are: Hungary, Slovenia, Latvia, Poland, Romania, Greece and Ireland.
However, one can understand that in Europe, detecting the market is one thing; implementing a well-managed platform is another, as regulation can be quite tough.
According to the “Consultation Paper on Peer to Peer Lending” issued by the Reserve Bank of India (which is precisely examining what regulations to implement in India), in countries such as France, Germany and Italy, P2P-lending platforms are as regulated as banks are due to their credit-intermediation functions. As such, the platforms must obtain banking licences, fulfil disclosure requirements and meet other such regulations.
In other countries (China, Ecuador, Egypt, South Korea, Tunisia), P2P-lending platforms are lightly regulated, meaning they do not have banking licences, but they have to meet some requirements such as laws on consumer protections.
However, as for any emergent market, regulations, as well as risk-management systems, will certainly be put in place step by step.
For instance, in China the number of platforms has exploded (more than 4,000 in June 2016), but the regulator detected more than 1,700 platforms with poor management or lack of capital, or even Ponzi schemes. The risk of fraud was such that the Chinese regulator stepped in to control the activities of these platforms. One rule requires online lenders to work with custodians for investor funds. Outstandings at stake in June 2016 amounted to $93.43 billion, according to the regulator.
The need of funding from investors also will push for more transparency.
In its article “Fears grow over P2P trusts”, the FT Adviser reveals that investors are lured by the yields offered by those trusts (more than 5 percent), but clear understanding of the risks is not yet there. Likewise, securitization of that outstanding may also tempt some investors, but without clear vision of what the risks are behind “a fund targeting unlevered gross returns of 12-13 percent and a 10 percent dividend yield”; securitization of such may remind one of the last sub-prime crisis. According to the press, regulators and investors could progressively ask for more transparency in the figures and guarantees, and they will also require more information and structure in risk management.
And here is the newest and most interesting issue of risk management that investors and traditional banks will have to face:
Among clients of P2P lending, some have no track record, and even no bank account; in India and China, where inclusion programs are developing rapidly, online platforms are well positioned to serve new clients who have only mobile access. Traditional risk-management systems are monitoring counterparty risks, based on clients’ borrowing capacities and track records already established. Even with no previous unpaid loans recorded, a client with less than a few months’ history in a bank probably will have more difficulty in getting a well-priced consumer loan.
But China, the world’s leader in lending platforms, is now developing totally different ways of approving loans than a traditional counterparty-risk management system. A very interesting article on https//e27.co/ titled “Your online, mobile, and social behaviour are now data-points used by fintech start-ups and governments in scoring credit-worthiness”, the author reveals that China is pushing to develop a nationwide social-credit system and has set up several provincial-level private pilot programs. The idea is to use the data extracted from mobile phones, social-network profiles, government and law-court services to draw risk profiles and classify people according to those who show good behaviour (and have a better chance of paying back their loans, or even being promoted) and those who do not. This revolutionary approach should particularly help the clients who have no track records in the traditional-banking system, but raises the question of how deeply into privacy the lender’s investigation can go in its decision of whether or not to grant a loan. Alibaba has launched the Sesame Credit platform to establish “social credit scores” integrating social data and behaviour.
Lending platforms will definitely renew the traditional counterparty-risk management approach in years to come!