P2P lending — a step forward for investment opportunities

The ourishing P2P lending is on the verge of profoundly disrupting the economy, catering best to SMEs and start-ups

by LYDIA NATHAN / Pic by MUHD AMIN NAHARUL

The number of small and medium enterprises (SMEs) continues to increase, in tandem with the growing digital economy in the country.

The Securities Commission Malaysia (SC) said there is currently a RM80 billion funding gap faced by SMEs. These SMEs are very important as they make up 97% of business establishments in Malaysia and contribute 65% to the country’s employment.

With the emergence of financial technology (fintech), the flourishing peer-to-peer (P2P) lending is on the verge of profoundly disrupting the economy, catering best to SMEs and start-ups.

It can be defined as the practice of lending money to individuals or businesses through online services that match lenders with borrowers.

Some have stated that P2P lending has the ability to address SMEs’ loan financing gap in the country.

This form of investment uses intermediaries who own online platforms that offer identification verification, funding approval and compliance — thus becoming a strong alternative to traditional banking.

One of the six P2P companies that have been regulated by the SC, Fundaztic.com, launched an online platform last Thursday, hoping to draw investors into funding 500 SMEs.

Fundaztic CEO Kristine Ng Wei Miem said this fairly new concept in Malaysia is a huge step from obtaining loans at traditional banks.

“Generally, banks require you to go into a branch and provide all forms of documentation. You need collateral or guarantors. It can also take a certain amount of time before you know if the loan is approved or not,” she said.

Fundaztic works in such a way that anyone can choose to invest. It starts off with an SME or a borrower who puts in an application for funding, which goes through a credit evaluation platform. The borrower is then passed on to the terms and agreement stage where they accept or decline. Signatures are processed electronically as well.

Ng said the process of screening is thoroughly done before it is hosted as a note on Fundaztic’s website. Here, a potential investor is able to browse through the different notes and then choose to invest once becoming a member of Fundaztic.

“Membership is free, and potential investors are able to browse through everything without making any commitments. The great thing about Fundaztic is that you can actually start with RM50. The chosen entry barrier is based on the principle of diversification.

“It is to ensure that even small time investors are able to have the opportunity to diversify their investments across as many as 100 different notes. The more an investor diversifies, the more spread out the risks are,” she added.

The second principle Fundaztic works on is the concept of reinvesting. In the world of P2P, it means compounding one’s return over a period of time without putting in extra cash.

Notes — an asset class introduced by the SC — are hosted on Tuesdays and Fridays only, improving the company’s structure better.

SMEs start their repayments monthly with investors receiving cash back immediately for the first month, while the other months are based on the repayment scheme from the issuer.

Fundaztic then earns a 1% fee from investors and 1% of the successfully funded amount for the duration of the loan tenure from the issuers, making it a seamless transaction of no charges to either party if not successful. Issuers are also open to settle the funding early to save on interest with no penalties, while investors get back the full sum.

“The P2P business in Malaysia is a very altruistic form of investment vehicle; you are earning interest, but also helping a business grow. In this manner, you also help the economy grow by helping SMEs,” she said.

Ng said while any form of investment poses risks, the team has been vigilant in protecting investors.

For instance, borrowers need to undergo authorities’ clearance — including from the Anti-Money Laundering and Anti-Terrorism Financing Act 2001.

“Of course protecting both sides are a priority, we see that we do all due diligence to that cause. In terms of safety for investors, money from them goes directly into a trust account so investors are protected. The SC also encourages Fundaztic to remind investors not to invest more than RM50,000 via an auto prompter on the online platform.

“We also have a back-up service provider, in any chance we are not able to manage the platform, it will enable us to conduct a seamless hand over to avoid any loss of money from investors. Fundaztic is also required to have a minimum paid-up capital of RM5 million from shareholders, in order to ensure we can sustain it,” Ng explained.

When asked if banks view P2P as competitors or threats, Ng said this is more complementary than a threat. Banks are also rejuvenating themselves and being more innovative, so co-existence is vital.

“Perhaps in the future, we might. We have access to richer and big data, the ability to be more predictive. For now we are leveraging on the banks’ processes, coming from the banking sector ourselves,” she said.

So, it turns out investing is not that complicated after all. Ng said they have seen a growth of younger generations in their 30s starting to invest — and this is where companies like Fundaztic plays a part.

“I would like to see young people using their mobile to make investments over lunch or drinks, instead of playing games or going on social media.

“The rising cost of living is something that everybody needs to deal with and now, with such a low-entry investment vehicle that Fundaztic provides, young people can start investing early and build a sizeable nest egg to better secure their future in the absence of parental net,” she said.

With the future of P2P looking extremely bright, fintech helps the unbanked, banked and gain market leadership in financing via superior user experience and product offerings by continuously innovating and improving themselves.