It used to be that if a big bank rejected your request for a loan, you were out of luck. Today, technology-savvy businesses are picking up the slack, offering lending options outside the purview of traditional banks. In the U.S. and UK, companies like Lending Club, Prosper and Earnest have led the march over the last 10 years into the brand-new alternative lending space. But today the global phenomenon of alternative lending has been experiencing particularly explosive growth in one regional market: Asia.
Over the last 5-10 years, China, India, and Southeast Asia have leapfrogged from a cash-based society to one where mobile payments are common currency, skipping adoption of credit cards, savings accounts and other consumer financial products common in Western countries. The result: a population that’s smartphone-savvy but still largely unbanked, without the credit histories necessary to access traditional small business or personal loans. It’s a prime market for alternative lenders, who usually use alternative means to assess creditworthiness, foregoing traditional credit scores 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 different lender types.
Types of alternative lenders
Alternative lending comes in many flavors, including exotic ones like invoice trading, equity-based crowdfunding and marketplace real-estate lending. For simplicity’s sake, in this article we’re only going to discuss the two main types: peer-to-peer (P2P) and balance-sheet lending.
In P2P lending, businesses simply provide a marketplace for non-bank investors to lend their money to borrowers. In these models, the businesses generally perform routine risk analysis on the borrowers to ensure some level of quality, but theoretically, the risk lies with the lender, not with the company, insulating them from risk. By contrast, balance-sheet lenders offer up their own capital rather than an investor’s. While this is closer to what traditional banks do, it differs in that alternative lenders’ loans are usually unsecured, which means the borrower offers no 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 uncommon in Southeast Asia
Both P2P and balance-sheet lenders can be further subdivided based on who they lend to— businesses, individual consumers, or both)—as well as whether they specialize in a certain type of loan, i.e. payday or car loans. 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 (US & Europe)|
|P2P Lending||Business & Consumer||ZhaoCaiBao (Alibaba), Lufax (China), i-lend (India), LenDenClub (India), LendBox (India), Faircent (India)||LendingClub (US), Prosper (US), CircleBack (US)|
|Business||Maneo (Japan), Funding Societies (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)||Upstart (US), SoFi (US), PeerForm (US), Zopa (UK), RateSetter (UK/AU), AuxMoney (GE)|
|Balance-sheet Lending||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 (US)|
|Specific Market||Buddy (India; students), Taralite (Indonesia; online merchants), EthisKapital (Islamic Financing)||Earnest (US; student financing), SoFi (US; student financing)|
|Business||UangTeman (Indonesia)||OnDeck (US), Kabbage (US)|
To see the incredible potential that alternative lending has to change the financial landscape, look no further than China. According to Bloomberg, China has 2,200 P2P lenders alone, and its P2P lending market is valued at an estimated $100 billion.
Historically, China’s state-owned banks have been hesitant to extend credit to individuals or small businesses. So when P2P lenders began appearing, they immediately found a market; indeed, P2P lending exceeded 2.8 trillion yuan ($400 billion) in 2016, the Epoch Times reports.
Chinese P2P companies saw 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 begun regulating the P2P market. Investors see this as an end to the risky “wild west” era of P2P lending, and the start of something more stable.
Balance-sheet lending is thriving in China, too. Tech giants Alibaba, Tencent and Baidu each offer unsecured consumer loans through their respective online banks, MYbank, WeBank and Jinrong. Chinese tech giants have aggressively pursued synergies between different divisions of their sprawling businesses. For instance, Sesame Credit, Alibaba’s alternative credit scoring program, looks at the frequency and cost of a customer’s purchases on Alibaba’s mobile payments platform Alipay in order to determine creditworthiness.
With deep pockets and existing mobile payments infrastructure, these companies dominate China’s non-P2P alternative lending market, to the point that smaller players have difficulty entering it. Combined with the government crackdown on P2P, this trend towards domination by a few companies makes the Chinese alternative lending market less attractive as an investment than it might previously have been.
Meanwhile, India’s alternative lending market is in a much earlier stage. Giant tech companies don’t yet dominate the scene, and so the balance-sheet lending landscape includes a large number of small specialists like EarlySalary (payday loans), ZestMoney (point of sale), and Buddy (targeted at students). There are only about 30 P2P lenders in the country, which is surprising for a country where nearly 40% of the population is unbanked, and therefore without access to traditional loans. It could be that the issue is with supply rather than demand: compared to China, India simply doesn’t have as many newly minted millionaires looking for places to invest their money.
Nevertheless, Indian regulators are gearing up for potentially dramatic growth in the P2P sector. In order to avoid the fraudulent setbacks that some Chinese consumers experienced, the Reserve Bank of India is already regulating the P2P market. Venture capitalists are framing these regulations as a positive development that makes it less risky to invest in Indian P2P startups. What’s more, the regulations will be unlikely to affect India’s most established P2P startups, like Faircent and i-Lend, which have been self-regulating from the beginning. In fact, Faircent claims that government regulation has made their organization more popular than before. i-Lend, which has over 3,000 lenders and 10,000 borrowers, predicts similar growth—founder Shankar Vaddadi estimates that P2P loans in India may reach 600 billion rupees (8.8 billion USD) in coming years, but couldn’t say how much is currently in the market.
P2P interest rates may be higher than those of traditional loans, but in India’s mostly cash economy, they are the only option for many. For people who have been historically neglected by traditional banks, the popularity of P2P lending in India continues to rise.
Southeast Asia has one of the fastest growing economies in the world, but the small- and medium-sized businesses (SMEs) that make it up have more limited access to financial credit than the global average. That’s why, even though the region’s alternative lending landscape isn’t huge yet, it’s likely that the market will take off there just like it did in China and India, bringing investing opportunities with it.
In Singapore, the financial center of the region, the major alternative finance players in Singapore are peer-to-company (P2C) lenders: specialized P2P lenders that only provide loans for SMEs. Market leader Capital Match was founded in 2014, but says it has already paid out more than S$32m (US$22.5m) in loans. Last summer, competitor Funding Societies said it had paid out US$8.7 million to date across 96 loans. Both companies are looking to diversify: Funding Societies is expanding its services to Malaysia and Indonesia, while CapitalMatch is trying its hand at providing secured as well as 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 lending. Thailand has done the same, issuing a consultation paper on regulations for P2P lending last fall. Southeast Asian countries are sending a message that they are ready for P2P, so investors should take note. It’s not only consumers and investors who are interested in increasing alternative lending in SEA, but those countries’ governments as well.
However, with so many different governments involved, SEA poses an especial overregulation risk. Already, P2P lenders here have to jump through hoops that their competitors in other regions don’t have to. For instance, Funding Societies has to channel its funds through an escrow agency registered with the Monetary Authority of Singapore (MAS) in order to comply with Singaporean crowdfunding regulations.
Since alternative lending has seen enormous expansion in China and seems poised for expansion in India, there’s a huge opportunity to invest in alternative lending startups in Southeast Asia as well. Alternative lending may be a new concept, but it’s one that is seeing quick and eager adoption all over Asia.
With contribution from Lauren Orsini and Reina Gattuso of Hippo Thinks.