After P2P lending, an alternative form of credit financing is taking shape

When Vihang Patel and Tan Sian Wee thought to set up a lending company, they wanted their business to combine what worked and what didn’t in the market. It was 2016, and the lending sector was at the tail-end of lending scandals, loan malpractices, and large-scale defaults globally.

Against the more mature lending models in the US and UK, newer models of small-business lending were emerging. “It’s a well-known fact that peer-to-peer companies (P2P) taper off at some point, have huge issues scaling [and] growing beyond a certain niche,” Patel says, referring to the limited upside that US lending giant Lending Club saw after its 2014 stock market debut.

(L-3) Finaxar co-founders Vihang Patel and Tan Sian Wee / Photo credit: Finaxar

In his former role as a Deloitte consultant for ING and the State Bank of India, Patel evaluated potential lending and credit companies that banks could invest in. The prevailing thesis then was that small businesses would continue to grow in economic value, and this would be accompanied by growing capital needs. “Given the existing [funding] gap was not being met – and that gap was going to grow in absolute terms – we realized that SME lending was going to grow as well.”

Patel and Tan, who met at Southeast Asian venture capital fund Monk’s Hill Ventures, saw another mismatch. In dealing with small and medium-sized lenders, they observed that their business models and balance sheets often reflected that of non-banking financial companies, although they talked about “a technology proposition.”

There was a way to use technology to bridge the “liquidity problem” in the market, which was in fact non-existent, Patel says.

“The debt market has a lot of debt – trillions of dollars – [so] a good market is always underdeployed at any point of time,” Patel adds. It was a problem of how to acquire the right type of customers and how to underwrite them.

That year, Patel and Tan set up Finaxar with one goal in mind: to provide SMEs with a viable financing solution. Using data and technology, the company would underwrite and extend loans that were operationally expensive for traditional banks to do. And unlike marketplace lenders, Finaxar would lend directly from its balance sheet – a more sustainable model, according to Patel.

The rise of P2P lending

Marketplace lending took root over a decade ago and was popularized by prominent players such as LendingClub and Prosper in the US as well as Zopa and Funding Circle in the UK.

P2P lending platforms provide the infrastructure needed to facilitate a funding arrangement between lenders and borrowers, who are often individuals or small businesses unable to secure loans through conventional channels or those seeking higher yields on their investments compared to bank offerings.

Low-cost and accessible, these internet-based marketplaces are willing to extend loans to small businesses despite their operational scale and lack of track record by using non-traditional data sets and credit risk models.

In China, mom-and-pop investors on the hunt for higher-yielding investment products act as a convenient funding source for individuals and small and medium-sized enterprises that need them. The model took off in 2013 and has spread like wildfire: the country is now the world’s largest peer-to-peer credit lending market. In 2016, the volume of new credit lent to businesses in China was US$61.2 billion, according to a recent report by the Asian Development Bank Institute (ADBI). Trailing behind were the UK and the US at US$1.8 billion and US$1.5 billion respectively.

In 2015, as many as 6,000 P2P lenders were operating in China, with ordinary people making returns from loaning out cash. But that number has dwindled to 708 by August this year after a series of high-profile collapses and massive defaults shook the industry, according to P2P-tracking portal Waidaizhijia.

The most infamous is perhaps now-defunct Ezubao, which channelled over US$9.14 billion from almost a million investors in China into fabricated companies on its online financing app.

A balance sheet lender

Filling in financing gaps

Building on ecosystems

Lending-as-a-service