Capital Match Logo
Amount funded to date: ...

Lack of credit risk data is key challenge to SME lending

26 - 11 - 2015 | Shiwen Yap | Deal Street Asia

With the growing interest in financial technology (fintech) and recent developments in the equity crowdfunding (ECF) space, peer-to-peer payment platforms are attracting the attention as an avenue for investment.

Co-founder of Capital Match, Pawel Kuznicki, a former McKinsey managing consultant and Rocket Internet alumnus, who served in senior roles at online fashion firm Zalora, has grounded views on the peer-to-peer (P2P) loan space.

Capital Match provides an online platform where borrowers can submit their business loan requests and prospective lenders can decide whether they want to extend the loan, targeting the short-term business financing segment. Recently, it secured an additional round of funding in a Series A round led by Innosight Ventures.

Capital Match claims that investors on its platform can expect returns of 20-25 per cent, while managing the entire process, from payment processing to due diligence, debt collection, and investor updating.

Kuznicki spoke to DEALSTREETASIA on the evolution of Capital Match, growth of P2P lending and insights into Rocket Internet and the business financing segment.

Edited excerpts:

What led you to found Capital Match after leaving Rocket Internet?

Rocket Internet was a great experience in learning to build a tech business. The P2P lending phenomenon was growing like crazy in the US, UK and China. Since it wasn't present in Singapore, I decided to launch a venture based here.

How many more rounds of funding do you foresee Capital Match engaging in? And how do you see Capital Match exiting - trade sale, IPO or via an M&A deal?

There are definitely more rounds to come, with multiple rounds of equity investment and debt financing likely. This is especially true if you want to fund regional expansion. In terms of an exit, we're too young to consider specific options seriously as of now. There could be an IPO or a sale to a larger entity at some point. But we're not looking to exit in the next 3-5 years, as we want to grow privately.

Where do you see the business financing segment evolving and what would you like to see from the government, in terms of regulations?

It's still a sector to a large extent that's neglected by banks. They prefer larger SMEs with loan amounts of 500K and higher. However, the key gap lies in 100k to 200k loans. Banks are too risk-averse to take up such notes.

Where the government-primarily MAS - can help is to create friendly P2P lending regulations. MAS might be working on it but there don't seem to be concrete plans yet, with no details communicated to anyone. A good regulatory framework would definitely make it more secure for lenders to lend and create more available options for borrowers.

Any comments on your co-founder Kevin Lim leaving the venture actively to pursue his role as a managing partner with 1823 Ventures?

He was with the company for four months from January to May this year. He was the CFO in that period and helped with funding and initial loan traction, but then he decided to pursue his own venture.

Could you explain the decision to use Haskell as the basis for the technical back-end of Capital Match's online platform to laypeople?

Arnaud Bailly, Co-Founder & CTO: Haskell is a very mature language, and a high-level language that allows programmers to express business-level concepts in a very direct and robust way. With Haskell we can develop a system that is more robust and resilient to changes, with fewer bugs, and that is guaranteed to scale gracefully in the future.

While it is still not very widespread, especially in the startup scene, we can see it being adopted by an ever-increasing number of leading edge companies and organisations around the world, especially in the financial sector. Standard Chartered, for example is well-known for having developed a very efficient Haskell-based platform for trading. Another local example is Zalora.

Plus Haskell developers, while not numerous, are highly motivated and talented people. This choice will allow us to attract the best developers, those that are passionate to work on truly innovative technology.

What are the most challenging aspects of running the business and dealing with various business brokers and SMEs seeking loans through your platform?

The key challenge of doing SME lending is the data available. Often, SMEs don't maintain their accounts properly or audit their financial statements. They don't have proper documentation for contracts and invoices. This significantly increases the risk due to incomplete data. They often run good businesses and are very decent people, it's just that their financial accounts are not complete enough to justify a loan of 100k to 200k.

We're considering different sources of credit data like transactional or behavioral data, in terms of determining the credit risk of a borrower based upon the profiles of the directors. While this is due to insufficient financial data, improvements in data would improve our credit risk process and increase lending activity.

What is the most challenging part of scaling Capital Match, and which are the international markets you're likely to target next?

Definitely automation, as it takes significant time to process the documents and process transactions, as well as run the entire credit risk process. Because this is time-consuming, the key to scaling in the business will be automation of processes, which we have started. In terms of expansion, the entire region is interesting; we're talking about 600 million people in a region where banking is still relatively small.

This is due to credit data being widely unavailable. We will have to focus on developing a credit risk algorithm for Malaysia, Philippines and Thailand to make it work. We don't have a specific country in mind. If we develop good credit risk technology, we'll consider it.

When do you predict a phase of consolidation to occur within the P2P lending industry locally and in the region?

Tough to say, but it will happen at some point. It's not a winner takes all market. Singapore may be justified with having 2-3 players, with other markets having more players given the size. But no country will have more than 4-5 players. There'll definitely be a success at the country level and some regional successes though. In the next 5-10 years, as P2P lending becomes more widespread, there'll be more players operating. But it's still a very small industry, so there's space to grow.

To date, what is the volume of deals that Capital Match has transacted?

As of November 18, 2015, we have processed S$3.5 million across close to 30 loans. These days, we do 600k to 700k worth of loans per month. In terms of our business revenue, we collect between 3% - 6 % of the loan amount, depending on various factors. We don't have any upfront charges and collect only through monthly repayments by the borrower. And in this way, our interests are aligned with those of the lenders.

What're your comments on the realty crowdfunding platform CoAssets exploring entry into the P2P lending space?

If you go to their website, there's a section that says it's under construction. However, if you browse through their listings on the website you can find a few P2P lending listings already. We've also heard from brokers that they're aggressively pitching their funding services to them.

How do you plan to respond to them, given they're a listed firm with the ability to raise more capital?

There's only one listed P2P lending platform - Lending Club - and there are many companies growing rapidly. There's so much private capital around, which is justified by the unicorn startups. These days you can fundraise billions of dollars in the private market. You don't need to be listed to successfully fund and grow the business.

What are some insights that you can share about Rocket Internet's practices and strategies as a former employee?

I would just confirm what is discussed widely - in my personal experience they were great on execution. The owners - the Samwer brothers - are the best in fundraising globally. They can just raise billions in capital.

There are accusations that the RI companies are run too aggressively, but this approach pays off in many markets and industries. It just costs a lot along the way so a high burn rate. But, in the startup game, they usually achieve a market leadership position. So I'd say that it pays off.

What insights, practices do you as a former management consultant bring to the startup sector, as a company founder?

From a McKinsey point of view, it's the worth ethic. I've seen many startups that lack a proper work ethic. McKinsey teaches you that. Problem-solving is also crucial. If you build a startup, there are so many more obstacles along the way than working in a corporation.

You're setting up processes, systems and technology and training people from scratch and you need to problem solve all the time along the way. And that's what McKinsey teaches you. Another thing is building relationships with senior executives, which is critical in finance.

Click here for the original article.