What is FinTech
Financial Technology, or FinTech, first flourished during the Internet explosion in the early 2000s when e-commerce models were the rage. It has since evolved into the sophisticated use of specialised software and algorithms to automate the delivery of financial services and optimise operations for businesses and consumers alike.
What is P2P Lending
Peer-to-Peer (P2P) lending is FinTech that at its core uses cutting edge technology to connect borrowers with investors via a single digital platform. With P2P lenders mushrooming across Singapore over the past few years, small and medium enterprise (SME) owners find themselves presented with more accessible sources of funding that are also tailored to their specific needs. This technology-driven method of lending has roots in the United States, United Kingdom, and other parts of Europe, while taking root locally and across Southeast Asia in the past half decade.
P2P lending has disrupted the lending landscape as we know it, offering infinite value to segments of the market that traditional financial institutions cannot serve. Gone are the days where money can only be accessed under a bureaucratic set of credit standards.
Today, P2P lending is no longer a nascent industry in Singapore, having gained much traction in the past couple of years. With the Monetary Authority of Singapore’s issuance of the digital bank license later this year, technology firms and non-banks in sectors including P2P lending, F&B, and gaming will soon be able to offer banking services under a consortium. Achieving this recognition in just five years of its entrance into Singapore, it is clear that this previously unheard of method of lending is steadily surfacing into the mainstream.
SME Lending Gap and P2P Potential
SMEs are a niche segment of the market with many pain points that P2P lenders had set out to serve. According to the Global SME Finance Forum, the SME funding gap throughout Southeast Asia stands at US$300 billion today. It is grossly underserved yet, SME contribution to the ASEAN gross domestic product (GDP) is 23-58%. This translates to a potential to lift the ASEAN GDP by US$1 trillion, making it not only a crucial market to serve but a lucrative one.
In a recent research report by the Cambridge Centre for Alternative Finance in collaboration with Asian Development Bank Institute and FinTechSpace, over 30% of the 208 surveyed FinTechs within the ASEAN region operate on the Digital Lending business model – the most popular model – beating out first and second runners-up like Digital Payments and Capital Raising Crowdfunding. This goes to show that lenders recognise the deep need for alternative sources of funding for much of our economy’s GDP contributors.
Why P2P lending will continue to succeed: Strengths
As FinTechs, P2P lenders simplify the loan application process by making it entirely digital. Business owners who often find themselves in urgent need of financing but with little time to spare no longer need to submit stacks of documents or queue up at a bank branch to apply for loans, both of which are cumbersome and outdated undertakings. Instead, they can complete this process from the comforts of their homes and with a few clicks on their computers. P2P lending is fully digitised and can disburse business loans to SMEs in as quickly as 24 hours, often to the relief of business owners.
For many, and in particular the F&B enterprises, cash is king. Mr. Prasad Raj, 66, a restaurateur who owns eateries in Little India, Changi, and Buona Vista, sought the help of P2P lending to pay “rent, staff salaries and Central Provident Fund contributions on time”.
Unlike traditional financial institutions whose credit underwriting approach is financial and asset-based, FinTech lenders determine their borrowers’ creditworthiness by their business data and cash flow. This means that SMEs with no to low credit track record can take a loan as long as the business owner has a clean personal credit record and the business has a strong pipeline of accounts receivables. Using a comparatively more flexible credit underwriting approach, FinTech platforms help SMEs to build a reliable credit track record, setting a strong foundation for them to take bigger loans from big banks in the future.
FinTechs were initially thought of as competitors to traditional financial institutions but this unexpected relationship in which incumbents and FinTechs coexist and complement each other is particularly defined in Singapore. The nation has been quick to set in place clear P2P regulations and a strong legal framework, making room for disruptive technologies to collaborate with existing banks in an efficient and well supported space. Coupled with many industry players’ desire to grow headcount by 25-50% in the next 36 months, and Government programmes to hone FinTech skills, the Singapore FinTech sector is set to thrive with a large talent pool.
Why P2P lending will continue to succeed: Opportunities
On top of that, Singapore’s competitive economy makes it ideal for companies to set up shop locally and expand overseas. In line with Government efforts, SME P2P lending is set to amplify, with intra-trade transactions as one of its priorities especially amidst uncertainties from the ongoing US-China trade war. Singapore’s strong reputation as an established regional financial hub also attracts foreign firms to make the country home to their regional headquarters.
The path of FinTech in Singapore is not slowing down even amidst the current economic downturn. Reported to have raised over US$460 million in funds from venture capitalists mid this year, it is clear that experts see the potential in the country, proving that in spite of the pandemic – or perhaps, because of it – the sector is set for a long and exciting journey ahead.
Not only is P2P lending one of the strongest drivers of Fintech in ASEAN, the role of crowdfunding is evidently critical in promoting economic development throughout the region.
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