'Giving power to the people', heats up Malaysia's P2P scene

• Disperses US$4.09 mil to US$38.4mil, number of campaigns increases from 418 to 2000
• Fundaztic does not require a deposit to invest and charges a fee of 1%, lowest in the market

YOU can mark 2018 as the year Malaysia’s peer-to-peer (P2P) lending space moved from taking baby steps to becoming an adolescent. From 418 campaigns that ran across the six licensed players in the space in 2017, 2018 saw a 300% increase in campaigns to 2,000. Even more impressive, funding raised increased by 900% to US$38.4 million (RM159.6 million) versus US$4.09 million (RM17 million) in 2017.

The timing could not be better as official funding channels for SMEs are expected to get tougher with heightening trade tensions and more exclusionary global trade practices.

As per the guidelines set by Securities Commission of Malaysia, only small medium enterprises (SMEs) are allowed to raise funds via P2P platforms which include Fundaztic, Funding Societies, B2B FinPal, Nusa Kapital, FundedbyMe and QuicKash.

With SMEs making up 98.5% of businesses in the country, P2P lenders are looking forward to stronger growth in the future with such a large market to cater to.

Market size aside, an even more exciting development seen to further boost P2P lending is the Securities Commission’s plans for a secondary market by the first quarter of 2019. Currently, investors must commit to a tenure of three years to obtain the return of all their principal and interest.

Currently, the average funding size is around RM90,000 with 150 people on average and a funding tenure of 2.5 years. “The secondary market is very important to the P2P space to allow flexibility and early exit in case investors need money in 12 months,” explains Kristine Ng (pic), director and founding chief executive officer of Fundaztic.

However, the P2P secondary market will be tied to each individual platform. “It won’t be open trading where notes from Platform A are sold to those on Platform B,” says Ng.

Even if an ECF secondary market were to come into play, Ng believes it will not necessarily result in investors making money but may be useful in terms of cutting their losses by selling off lacklustre investments. “ECF is about putting in a bigger chunk of money over a longer time period without any returns. If a company does well, there may be dividends. But even then, it will not be enough to cover the invested capital.”

Helping those off the radar of the banks

Ng shares that Fundaztic plans to close the gap to financing by, “targeting 80% of the 98.5% in the SME ecosystem – the micro, small and startups.”

“Incidentally, these are the ones that are off the radar of the banks and are facing difficulties in terms of access to financing – not because they are not viable businesses, but certain policies of banks are not friendly to these businesses,” she explains, adding that most banks would not lend to businesses in operation for less than two years.

As for the current business sectors that turn to P2P lending as an alternative, Ng shares that it ranges from manufacturing and construction to wholesale and retail businesses. “Typically, the bulk of it is made up of wholesale and retail businesses because 65% - 75% of the market is made up of that.”

Fundaztic is open to segments that the banks are not targeting. “We don’t discriminate against any industry. For example, the food and beverage sector find it quite impossible to get funding from banks. Because they are mostly cash businesses, the perception is they need not borrow if they are doing well. And if they are not doing well, banks question their ability to pay back.”

Ng further says, “We needed to find a way to underwrite these businesses. We evaluate them by looking at the people behind the business – some could have very good credit behaviour, reputational risk or could be high nett-worth individuals. There are ways to evaluate the business viability and we thought they are worth the chance.”

With Fundaztic itself being a relatively new company, it can empathise with new businesses in the market. Ng aptly shares another meaning behind the acronym P2P, “Power to the people. We give businesses a chance by putting them on our platform and letting the crowd decide.”

P2P lending vs Equity crowdfunding

Essentially, both P2P lending and equity crowdfunding (ECF) are forms of crowdfunding. “But the diffentiation lies in how the SMEs raise funds and the returns the investors get,” Ng says.

Through ECF, the companies raise funds by giving shares or equity to shareholders in return for capital. Ng describes ECF as a “longer term” and “patient sort of investing”. She explains that, “investors don’t expect the equity to multiply in value tenfold. Instead, these ECF investors are looking for the next unicorn if possible – that’s the value they want.”

However, the number of unicorns that ECF platforms can foster is an uncertainty investors must contend with. “The ability to evaluate unicorns lies not just with the platform, but with the investor’s ability to carry out due diligence and understand the people behind the company. It requires a lot more homework.”

Ng believes P2P or credit-based crowdfunding is a much easier way for investors to make money. “By investing in the debt of SMEs, they earn interest that the companies are paying on a monthly basis while the P2P platform monetises a certain portion of that,” she says, adding that Fundaztic is the cheapest platform in town charging only 1%.

As long as there is a repayment, investors are assured of monthly returns. “Therefore, I’d say the risk is slightly lower since it reduces every month with each repayment.”

Additionally, another benefit of P2P lending is the diversification opportunities it presents. “We host 12 to 15 notes weekly on our platform whereas for ECF, the campaigns are hosted less frequently. It does not reach that number even on a monthly basis.”

Based on Ng’s calculations, “If an investor holds 100 notes and the default rate is 5% per annum with a funding tenure averaging two years, he will still be able to earn double the fixed deposit rates after accounting for the default and our 1% fees.”

Power to the people

Fundaztic positions P2P lending as an altruistic way of building wealth. “At the same time, you are also building the backbone of a company and economy building.”

“We want to involve the masses as much as possible. It is not just about financial inclusion for the SMEs but also financial wellbeing for everyone,” Ng shares.

As such, Fundaztic’s platform allows people to start investing with just RM50 without the need for any deposit. “While all other platforms require a deposit as a sign of commitment, we decided to do it differently.”

The Fundaztic team arrived at this decision based on their experience running a rewards-based crowdfunding platform before P2P lending began in Malaysia. “Back then, our biggest concern was the trust of people in our platform. They are reluctant to commit money before seeing something they like.”

With this learning in mind, the team did not implement the deposit method. “We felt that if we started with it, it might be a deterrent for people to even be interested. As long as we are compliant with the Personal Data Protection Act (PDPA), we allow users to browse our site and read information before putting in money.”

Fundaztic also provides a user-friendly interface akin to online shopping. “It needs to be something people have used before and trust. Users can see the notes and read about it. If already member, they can log in and invest.”

In terms of transparency, Ng shares that Fundaztic is as transparent as possible with information with the exception of company and investor names. Ng says this is to prevent hazards both ways, “If a company is late in repayment and its name is disclosed, there is nothing preventing the general public from boycotting the company when it is just starting up.”

It is also Fundaztic’s way of keeping companies and investors on the platform. “If we reveal investor names, there is nothing preventing companies from approaching them directly and striking a deal among themselves instead of using the platform.”

Growth and default

As far as default risk goes, Fundaztic heavily uses data from Bank Negara’s Central Credit Reference Information System (CCRIS) and Credit Tip Off Service (CTOS). “We are very fortunate because the data is fed into the system very accurately by banks. Otherwise, they are heavily fined.”

With this control in place, Fundaztic is able to reject or approve companies within ten minutes. With these stringent checks in place, Fundaztic’s number of defaults to date amounts to three. 

“For those we take on board, we tell them they don’t just disappoint one person in the case of default. They disappoint hundreds of people,” Ng says, adding that Fundaztic also carries out face-to-face and phone interviews with companies, as well as site visits by independent authorities.

The industry has experienced strong growth since it first started two years ago. “The amount dispersed has increased to RM159.6 million from RM17 million, while the number of campaigns has increased from 418 to 2000.”

As for Fundaztic’s expansion plans, Ng says, “We are considering some Southeast Asian markets but we are very prudent being a team of ex-bankers. We want the model to hold well in Malaysia first.”