Funding Societies is the only Southeast Asian P2P online marketplace that operates in multiple markets, but that is likely to change. Singapore rival Capital Match is lining up strategic partnerships in two other local markets it intends to enter this year.
If the contest is joined, it will show what kind of business models are best suited to doing peer-to-peer lending in multiple markets across the region – and attract (or repel) other P2Ps and their investors looking at building cross-border businesses. It could also influence how banks, which are partnering with such companies, will look at future relationships.
Finally, competition between the sector’s local leaders will also validate the investment decisions by their primary venture investors: Sequoia Capital has backed Funding Societies to the tune of S$10 million (US$7.2 million), while Dymon Asia Ventures has invested S$2.4 million (US$1.7 million) in Capital Match.
What this isn’t: it’s not cross-border. Although a challenge for fintechs in Southeast Asia’s fragmented markets is scale, neither Funding Societies nor Capital Match are attempting to pool borrowers from multiple markets. It’s market by market.
Nor are the business models apples-to-apples comparisons. Both facilitate lending and invoice financing to small companies, but they use different approaches, and promote different kinds of products.
But whether one of these fintechs turns out to be better at finding how to scale diverse businesses – through risk management, deal origination, more efficient use of capital, or clever partnerships – could determine whether any company attains dominance, or if multiple P2Ps continue to operate side-by-side.
Capital Match: staying conservative
Capital Match has originated S$42 million in loans since it opened doors in 2015, making it the biggest marketplace lending platform in Singapore, says Pawel Kuznicki, founder and CEO. It focuses on short-duration loans and invoice financing, and to date has operated only in Singapore, which offers rule of law and clear regulation.
The company is looking to raise another S$5 million to finance its expansion into two or three Southeast Asian markets, which Kuznicki declined to identify. He is in talks with potential partners for each market – which could include banks, telecom companies or retailers.
He wants partners to help secure origination channels for invoice financing; this is a trade agreement regarding an asset, rather than a loan, so it doesn’t require a license. Capital Match isn’t prepared to go into SME loans in new markets.
“The credit risk in these countries is higher than in Singapore,” Kuznicki said. “Indonesians have smartphones, but do they have a credit culture, or a culture of rule of law?”
He says going in alone into some of these markets is too risky. “We’d rather go slowly and work out partnerships first,” he told DigFin. The ability to verify identities and creditworthiness in most other countries is difficult, and legal systems are ineffective in upholding contracts.
But local banks, corporations and e-commerce platforms are another matter, because they have already amassed data on customers, which is more valuable than traditional documentation. “Customers already transact with them, and they can judge how well a business is doing,” Kuznicki said, adding such partners do not have expertise in online marketplace lending.
“When you’re a startup, giving a loan is easy, but collecting it is hard,” says a person familiar with the P2P space in Singapore. “Pawel’s thesis is to let partners take the risk.”
In fact, Capital Match has a partnership with a bank in Singapore, which Kuznicki declined to name. That is a cross-referral agreement, in which the two parties recommend clients that are beyond their service capabilities to the other. But an arrangement in other markets would need to be more involved.
Funding Societies: local knowledge
That’s not that different from what Funding Societies does, however. It launched its operation in Singapore in June 2015, and subsequently entered a cross-referral relationship with DBS Bank, says Kelvin Teo, its co-founder.
Funding Societies has a broader product mix, including unsecured term loans to SMEs, invoice financing, and microlending. Whereas Capital Match limits its duration to 30 days on average, Funding Societies’s average loan extends 10 months.
It now has over S$25 million of loans outstanding in Singapore, but its founders also decided to expand into Indonesia and Malaysia, giving the business now a cumulative of about S$50 million of outstanding loans, making it the biggest P2P in Southeast Asia.
Teo says the company did this because he and his partner, Reynold Wijaya, are from these places: Teo is Malaysian, and Wijaya is Indonesian. Therefore they felt a certain degree of comfort in wading into these places, despite the lack of reliable courts or documentation.
Teo says there is no structure or device to defend against default and fraud other than being very conservative about who is eligible to borrow on the platform. Nor is there recourse beyond social pressure and public shaming for the most recalcitrant borrowers. So far, he says, the company has only suffered one default in Indonesia. (Capital Match has had two default situations so far.)
Although the company set up its Indonesia business by itself in January 2016 (under the brand ‘Modalku’, or ‘my capital’ in Bahasa), it subsequently partnered with Bank SinarMas, to provide references as well as an escrow service.
And it signed a similar agreement with RHB Bank before it opened doors in Malaysia at the start of 2017, Teo says. It also did so only after securing one of six licenses to operate P2Ps in the country issued by the Securities Commission.
“We do see the value in partnering with a bank, but we can also go in by ourselves,” Teo said. Moreover, the underwriting and the collection of loans remains the P2P’s responsibility.
He says banks enter these agreements for intangible reasons. P2Ps are facilitating financing that banks don’t want to do anymore, or have never done. But banks recognize that some P2Ps might grow to a size that matters, and so they’re developing relationships early. They also see value in being seen as aligning themselves with trendy techies, and it can help them push internal reforms to promote innovation and agile working.
However, partnerships with banks don’t impact the risk-return calculation for P2Ps.
Despite the high risk of operating in Indonesia and Malaysia, Teo says the interest rates offered to investors can’t be too high, as that would go against the platform’s goal of helping SMEs obtain financing. It charges Indonesian companies 18% to 22% annualized for an unsecured loan, versus 5% to 6% for a fixed deposit. (Funding Societies also mostly facilitates unsecured loans, with invoice financing only 20% of its mix.)
“We’re still evaluating whether to enter other markets,” Teo told DigFin. “They all have different regulation, different economies, different social structures.” But he says there are no immediate plans to add a new market, in part because the founders simply don’t have enough local experience.
This article originally appeared on July 3, 2017.