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It used to be that if a big bank rejected your request for a loan, you were out of luck. Today, technology-savvy businesses are picking up the slack, offering lending options outside the purview of traditional banks. In the U.S. and UK, companies like Lending Club, Prosper and Earnest have led the march over the last 10 years into the brand-new alternative lending space. But today the global phenomenon of alternative lending has been experiencing particularly explosive growth in one regional market: Asia.
Over the last 5-10 years, China, India, and Southeast Asia have leapfrogged from a cash-based society to one where mobile payments are common currency, skipping adoption of credit cards, savings accounts and other consumer financial products common in Western countries. The result: a population that’s smartphone-savvy but still largely unbanked, without the credit histories necessary to access traditional small business or personal loans. It’s a prime market for alternative lenders, who usually use alternative means to assess creditworthiness, foregoing traditional credit scores altogether.
Below is our attempt at a simple, high-level guide to alternative lending in China, India and SEA today, starting with a taxonomy of different lender types.
Types of alternative lenders
Alternative lending comes in many flavors, including exotic ones like invoice trading, equity-based crowdfunding and marketplace real-estate lending. For simplicity’s sake, in this article we’re only going to discuss the two main types: peer-to-peer (P2P) and balance-sheet lending.
In P2P lending, businesses simply provide a marketplace for non-bank investors to lend their money to borrowers. In these models, the businesses generally perform routine risk analysis on the borrowers to ensure some level of quality, but theoretically, the risk lies with the lender, not with the company, insulating them from risk. By contrast, balance-sheet lenders offer up their own capital rather than an investor’s. While this is closer to what traditional banks do, it differs in that alternative lenders’ loans are usually unsecured, which means the borrower offers no collateral; as mentioned above, alternative lenders of all stripes tend not to rely on traditional credit reports, the simple reason being that accurate credit scores are still uncommon in Southeast Asia.
Both P2P and balance-sheet lenders can be further subdivided based on who they lend to- businesses, individual consumers, or both)-as well as whether they specialize in a certain type of loan, i.e. payday or car loans. Here is a brief taxonomy of the many types of alternative lenders currently operating in both Asia and the West.
Southeast Asia has one of the fastest growing economies in the world, but the small-and-medium-sized businesses (SMEs) that make it up have more limited access to financial credit than the global average. That’s why, even though the region’s alternative lending landscape isn’t huge yet, it’s likely that the market will take off there just like it did in China and India, bringing investing opportunities with it.
In Singapore, the financial center of the region, the major alternative finance players in Singapore are peer-to-company (P2C) lenders: specialized P2P lenders that only provide loans for SMEs. Market leader Capital Match was founded in 2014, but says it has already paid out more than S$32m (US$22.5m) in loans. Last summer, competitor Funding Societies said it had paid out US$8.7 million to date across 96 loans.
Since alternative lending has seen enormous expansion in China and seems poised for expansion in India, there’s a huge opportunity to invest in alternative lending startups in Southeast Asia as well. Alternative lending may be a new concept, but it’s one that is seeing quick and eager adoption all over Asia.
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