Peer-to-peer lending needs big data to have a future
When it comes to profitability, Indonesian banks are the envy of Asia. Their robustly handsome margins are a dream for banks in Malaysia, Thailand, Philippines and India.
That’s even more remarkable given that the archipelago of 18,000 islands has almost 120 banks while its peers in ASEAN have merely one-third of that number. Clearly the number of competitors has not impacted profits. After years of peaceful co-existence, it seems finally there is pressure at the periphery. A new phenomenon is underway in Indonesia in the form of peer-to-peer (P2P) banking.
This new system allows individuals to lend to each other online and removes the intermediary (bank) in between.
Removing the bank in between means the lender gets a higher rate for his capital and the borrower gets his loan at a cheaper rate. While this is a new trend in Indonesia, it has been playing out since almost a decade in developed markets.
Indonesia is wisely being cautious. The Financial Services Authority (OJK), the regulator, has laid out regulations for the same which includes conditions like foreign ownership being restricted to 85 percent, loan size capped at US$150,000 and the fact that foreigners can only be lenders.
Importantly, their regulations include the requirement of an escrow account to ensure that P2P platform owners do not access the capital intended between the borrower and lender.
These are necessary factors to ensure innocent lenders are not scammed away. China’s eZubao’s ponzi scheme of over $7 billion last year is a reminder that newage businesses also need regulations for sustainability.
Undoubtedly, there is an opportunity to tap into the large population in Indonesia — much of it that remains unbanked. The key to meaningfully exploring this advanced form of lending without causing any systemic risk is — data, and importantly accurate data.
Data relating to the credit worthiness of small companies and individuals so that one can decide if the borrower is creditworthy. Once deemed creditworthy, the next challenge is in deciding the fair price (interest rate) for the borrower.
Online banks in China like WeBank and MYbank that are promoted by Tencent and Alibaba respectively are not going to have a similar parallel soon in Indonesia. Online banks’ are promoted by giant technology and ecommerce companies for a reason — they have more data on customers than traditional banks.
MYbank evaluates the financial history of individuals and companies who transact and deal on Alipay and other platforms owned by Alibaba to grant loans. This has allowed a sizeable number of customers who possess a challenge in securing loans to bypass the banks in favor of such digital entities.
Indonesia is too early in its e-commerce wave with only 46 million people purchasing items online more than once in a month according to the Indonesian Internet Service Providers Association (APJII).
Thus, Indonesia needs a credit rating agency that will have the ability to collate the previous historical track record of every single individual with regard to their repayment capabilities. In the US, there is FICO that does this task based on consumer credit files of three national credit bureaus.
While FICO has been in existence for six decades, India’s CIBIL has made substantial strides in a short span of time. Its shareholders and members are the key banks and financial institutions. The members submit data to CIBIL on a monthly basis that contains all information on all its borrowers in a standardized format. It now maintains credit records of over 550 million individuals and businesses. Those records determine the availability and price of credit for a borrower.
Indonesia must employ a similar mechanism wherein its largest lenders like Bank Mandiri, BNI, BCA and BRI support such an agency that will be of benefit for risk management purposes.
Customers do transactions with numerous banks depending on the deal on offer — hence data sharing among institutions is of critical importance to ascertain the credit profile of a borrower. That will be beneficial for banks as well as P2P lending platforms.
Yet, if P2P sites are to succeed, Indonesia needs to go beyond the data they receive from banks. Banking penetration is merely 36 percent — half the penetration seen in Thailand and Malaysia. Hence, data from banks will have their limitations.
The remaining population must be evaluated as well regarding the repayment discipline and capability. One pervasive instrument is the mobile phone with penetration over 100 percent in Indonesia with only 2 percent-8 percent of connections being post-paid thereby needing an address and ID.
Globally, connections have moved from prepaid to postpaid and incentives for the same are needed in Indonesia. Prepaid simcard purchase must also need identity checks of the customer. This will not be a comprehensive check but a beginning for lenders to gauge the payment discipline of a prospective borrower.
Similarly more services like electricity bill payment need to be consolidated and structured for an effective credit rating mechanism. The eventual goal must be to have a database that records the regular and bulk spending habits of all individuals.
The disadvantage of P2P is that, unlike customers of most banks, its loans are unsecured in nature — without collateral. Hence, extensive customer data is a necessity. The recent tax amnesty plan may have brought the wealthy layer into the information database but the real fortune in future will lie in the vast volume at the bottom of the pyramid. Technology needs data for its effective use.
In the absence of data collation, several borrowers may even voluntarily default with little fear for the consequences. Borrowers must recognize that there is a price for default — be it during their next mortgage or car loan. In developing markets, that is often a bigger disincentive than the tedious legal route.
If that doesn’t happen, in pursuit of safety and stability P2P will land up only catering to the small segment of population that is already engaged with banks and providing them cheaper lending rates and higher deposit rates. That may be bad news for banks’ profitability but it will be even worse news for the large unbanked population that is crying to join the system.