Pioneered by US-based firms like LendingClub, the peer-to-peer (P2P) lending market has witnessed an explosive boom in China and Southeast Asia.
Funding Societies, founded in 2015, targets small and medium-sized enterprises, seeking to fuel their growth through investor funding. It operates in Singapore, Indonesia and Malaysia.
In an interview with EJ Insight, co-founder and CEO Kelvin Teo shared his vision of supporting SME owners in starting or growing their businesses by providing them access to funding.
Teo and his classmate Reynold Wijaya started the business right after graduating from Harvard in Boston.
The Singapore-based firm runs an online platform that offers loans to SMEs in relatively smaller amounts and shorter timeframes, while attracting individual and institutional investors to grow their capital by providing funding to these enterprises.
Since its founding, Funding Societies has issued more than 480,000 loans amounting to more than S$560 million (US$409 million) to SMEs in Southeast Asia. The average loan amount is S$200,000 (US$146,000).
The market has seen a spike in online P2P lending in Southeast Asia, where millions of cash-strapped businesses and consumers have little or no access to bank credit. Tacking this pain point, Funding Societies enables borrowers to complete the entire lending process online through their websites and mobile applications.
For a loan of less than S$100,000, applicants can get results on the same day, while traditional banks normally take one to two weeks to process such a loan.
Borrowers can apply for a loan of up to S$2 million without collateral.
To its investors, Funding Societies does not guarantee interest income or even a return of their principal.
But while they bear all the downside risks, investors also enjoy better returns, Teo said.
Return on investment on the platform is in the form of interests ranging from 8 to 18 percent per annum, much higher than that offered by traditional banks.
There are more than 120,000 investors registered on the platform, and Funding Societies charge them a basic service fee, chargeable only when they receive a repayment, as an income source.
“Digital financing and peer-to-peer lending are both easy businesses to start, but terribly hard ones to do well,” Teo said.
In the case of Funding Societies, it is not uncommon for SMEs to be late in their repayments due to business-related reasons, such as late payments from their own clients.
Teo said the current default rate on the platform is about 1 percent, which is lower than the industry norm.
In order to combat credit fraud, the team conducts both automated and manual checks, including document analysis to detect alteration and forgery, credit analysis across data points, as well as human discretion for verification.
For the borrowers, Funding Societies automatically deducts the monthly repayment from their bank accounts, for the convenience of SMEs and as an assurance to investors.
Teo said his firm is one of the first and few platforms to have an in-house collections team. “In extreme cases, we take legal action on the SME and their guarantors, i.e., directors or corporates, to recover funds,” he said.
“We believe in our SMEs as much as we respect our investors. We will not risk investors’ money in loans that we are not willing to risk ours,” Teo told EJ Insight. “This is the genesis of the ‘skin in the game’ philosophy.”
Teo said selected team members of Funding Societies, including the two co-founders, also invest in all, if not most, of the loans on the platform, in order to align interests with the investors.
Funding Societies’ prudent capital management has convinced tech investors and heavyweights such as Sequoia Capital India, SoftBank Ventures Asia and Alpha JWC Ventures to invest in the scheme.
Since its founding in 2015, the firm has raised above US$33 million of venture capital.
While the startup is still working towards profitability, Teo hinted in the interview of his plan to launch an initial public offering in New York.
“If we continuously do good work and positively impact SMEs and societies, we’ll ring the bell in New York one day,” he said.
When asked about the timeline, he said they prefer to focus on going good work instead of a timeline. “If we do this right, financial returns will come.”
In China, hundreds of P2P lending firms have employed aggressive practices to enlarge their loan book and market share amid the intensifying competition.
This, however, has resulted in massive defaults and collapses of P2P lenders, while triggering protests from angry investors who demand compensation for losses.
Teo believes the key factor behind the collapse of peer lending in China is the lack of regulation. “China had taken an unregulated approach to P2P lending until 2017, allowing platforms to go unchecked for 10 years. Under the weight of competition, platforms began to cut corners. By the time regulation caught up, fraud was rampant, public trust was lost, and it was too late.”
He said while Singapore, Indonesia, and Malaysia have all swiftly regulated the P2P lending sector in 2016 to 2017, “we do worry unreasonable regulations [in the Southeast Asia market] driven by the China P2P lending collapse and lobbying may creep in to ultimately paralyze or render the P2P lending industry unsustainable.”
“We do not favor less regulation, but appropriate ‘fit for purpose’ regulations. It’s the combination of regulations that enabled the P2P lending sector to grow,” he added.
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