Author: Sutapa Amornvivat, Ph.D. Published in Bangkok Post newspaper/ In Ponderland column 29 November 2018
The recent announcement by the Bank of Thailand on peer-to-peer (P2P) lending rules represents a significant paradigm shift. If all goes to plan, by early next year Thailand will be among the few Asian countries, most notably China and Indonesia, to legalise this match-making platform between lenders and borrowers.
While this move speaks volumes about the progressive policy environment for Thai fintechs, the risk manager in me says that we should carefully weigh the pros and cons before jumping in.
The concept of P2P lending is a platform as a matchmaker role between investors — retail or institutional — with available funds, and borrowers who need the funds. In theory, such a platform can greatly enhance market efficiency and better allocate funds between people, overriding cumbersome intermediaries such as banks. It would be a win-win situation for both sides — investors get better returns; while borrowers get better interest rates and access.
Yet, this year, we have all heard of a series of bad press in China about hundreds of P2P lending platforms having gone bust. Its repercussion of eroding trust in this industry has become the key debate in the global fintech space.
On the other hand, success stories rarely make the news. There are P2P lenders in the US and the UK that have performed well for over a decade. Even in China, some have emerged as victors despite the growing mistrust. Thailand is blessed with the opportunity to learn from these experiences to ensure we start off on the right footing.
There are key lessons to learn from the crisis in China for all parties — those thinking of starting up a new P2P platform, potential investors, consumer protection groups, as well as regulators.
First and foremost is how to mitigate fraud and security risks.
In China, before the recent crackdown, there were several cases of outright fraud by platform operators. Ezubao, one of the largest players, ran a Ponzi scheme that made off with 100 billion yuan (nearly half a trillion baht) from investors. Many others were caught in a similar fashion. Regulators should have a stringent monitoring system to prevent such scams. Investors, too, should be wary of the trustworthiness of P2P platforms.
In terms of security, given the popularity of the P2P lending market in recent years, this industry will surely continue to be a top target for cybercriminals using stolen identities to create loan applications with synthetic credentials. Platforms that place an emphasis on cybersecurity and airtight KYC technology will thrive without risking fraud losses or exposing investors' and borrowers' sensitive information. Protecting the platform against fraudulent activities, of course, is not cheap. Therefore, finding the right trade-off between platform fees and fraud risks will be crucial to borrowers and investors alike.
Another key lesson is how well P2P platforms manage liquidity risk. Most of the recently collapsed platforms in China like PPMiao (which prompted a major protest in Beijing) experienced a run, similar to a bank run, where investors withdrew money at the same time, leading to a liquidity shock. This can be mitigated by having a separate fund to buffer such a risk or a fund portfolio mix of some larger investors similar to platforms in the US and UK.
Last but not least, we must educate the public. Borrowing money from friends and family is a simple concept, but with a digital platform and internet connection, P2P lending broadens the reach for borrowers to access capital from someone else.
At the same time, investors have options to seek higher returns than bank deposits. In this process, the platform has a role to play as a matching mechanism. It should possess a robust and time-tested credit scoring model allowing investors to understand the risk and make better informed decisions.
Underwriting a loan, especially one without collateral, is not easy and requires deep consumer credit knowledge. Positive investor returns are never guaranteed. Investors in P2P platforms must understand the risks of this new kind of investment. A misconception exists that P2P investment is very low risk. This has led investors to discount the importance of diversification. As seen in China, retail investors lost their life savings by mistaking P2P investments as safe deposits with promised returns; altogether too good to be true.
P2P lending has the potential to address the loan shark problem in Thailand and improve financial inclusiveness. It could also raise awareness of the Thai public about financial investment to think about returns on their financial assets beyond bank deposits, preparing us to enter an ageing society.
No one should be afraid of P2P lending. If done right, the introduction of P2P will no doubt present many opportunities for Thailand. However, we should tread carefully. It is vital we learn from the past lessons — both the successes and failures of other P2P platforms to ensure their best practices are emulated and their mistakes are not repeated.