Why e-commerce firms could replace banks as the region’s leading lenders

The simultaneous rise of peer-to-peer lending and big data could drastically change the region’s banking industry

Peer to peer lending (P2P lending) first entered the wider public’s consciousness when it rose from the ashes of the global financial crisis in 2007. By cutting out traditional intermediaries, such as banks, the lending platforms, were able to offer borrowers lower interest rates and lenders higher returns. They were populist alternatives to the casino capitalism that had brought Wall Street to its knees.
Now, they are being mooted as an effective way for Southeast Asia’s emerging economies to overcome the challenge of limited access to funding – and the combination of increasing smartphone penetration and a large unbanked population means it has the potential to dramatically disrupt the regional financial order.
According to a 2015 report by Deloitte, in Indonesia, Malaysia, the Philippines, Singapore and Thailand there exists “a clear disparity between what SMEs want and expect from banks and what the banks can deliver”. In Indonesia, the report found as few as 6% of SMEs were able to access bank loans.
Recent statistics from the Asian Development Bank show that the situation is similar in Myanmar, which the bank says suffers from a $2 billion shortage in available credit, a shortfall that Brad Jones, CEO of Wave Money, attributes to the country’s excessively cautious banking regulations.
“The banking system does not allow for unsecured credit. If you want to borrow money, you need to have collateral to base it on,” said Brad Jones, CEO of Wave Money. “That makes it very hard for entrepreneurs who need funding.”

Jones said that while such regulations were designed to promote economic stability, they were unintentionally driving people towards informal lenders, who were often lending at usurious rates.
“What I’d like to see is further deregulation of the lending practices in the banks, and opportunities for fintech operators to work with banks, leveraging their balance sheets to distribute those [loan] products” he said.
The region has a great need for alternative funding, but it also has the means necessary to enable such forms of finance to flourish. In addition to efficient credit underwriting processes and lender liquidity, it boasts a large dataset due to the widespread use of smartphones.
A report released by Hoot Suite and We Are Social in January revealed that 47% of Southeast Asia’s more than 600 million inhabitants are mobile internet users. According to Vishal Bhargava, vice president of strategy for India-based financial information company Cogencis, the data captured from the usage of these devices provides insights that are more useful in determining an individual’s creditworthiness than the data captured by traditional banks.
“Firms want to know what phone a person is using, which sites they are visiting. [They want access to] the pictures on the phone which show where the person goes on holiday,” he said. “These are the indicators which firms use to determine whether the borrower has the capability to repay a loan or not.”
The growing importance of big data in the issuance of loans could have interesting consequences for Southeast Asia, if China’s recent experience is anything to go by, said Bhargava.
“E-commerce companies are moving to floating online banks since more people buy and trade online through Alibaba than have bank accounts,” he said. “The premise is simple and ominous: I know more about a prospective borrower than a traditional bank does. Hence, my decision to give a loan is more informed than a bank.”

According to data from Singapore-based venture capital fund Dymon Asia Ventures, less than 0.1% of loans in the region currently originate from P2P lending sources, compared with 10% in China and 2-3% in the UK and US. There is, therefore, sufficient growth potential for the Southeast Asian P2P lending market.
But the region won’t see the benefits of P2P lending unless regulators protect the capital of lenders by imposing “limits on lending amounts and escrow account creation so that the P2P owners can’t access the capital”, warned Bhargava.
“Currently there is a contradiction between the desires of investors in a P2P platform and lenders using the P2P platform,” he said. “Investors make money when the quantum of loans and number of transactions rise as that is what is driving valuations of P2P lending firms. But lenders make money only when borrowers repay back which means that there needs to be careful evaluation of borrowers, which means growth should never be as brisk.”