Flyers announcing quick loans are rife on the streets of Bangkok. Peer-to-peer loans have the potential to solve the problem of loan sharks in Thailand. (Photo by Pattarapong Chatpattarasil
The Bank of Thailand’s recent announcement on peer-to-peer lending (P2P) rules represents a significant paradigm shift. If all goes as planned, by early next year Thailand will be among the few Asian countries, including China and Indonesia, to legalize this lender-borrower matchmaking platform.
While this move says a lot about the progressive political environment for Thai fintechs, the risk manager in me says we should carefully weigh the pros and cons before we jump in.
The concept of P2P lending is a platform as an intermediary role between investors – individuals or institutions – with available funds and borrowers who need it. In theory, such a platform can greatly improve the efficiency of the market and better distribute funds among people, avoiding cumbersome middlemen such as banks. It would be a win-win situation for both parties: investors get better returns; while borrowers get better interest rates and better access.
Sutapa Amornvivat, PhD, is CEO of SCB ABACUS, an AI-based data analytics subsidiary of Siam Commercial Bank, where she previously headed the business intelligence center and risk analysis division. She holds a BA from Harvard and a PhD from MIT. email to [email protected].
Yet this year we have all heard of a slew of bad press in China about hundreds of P2P lending platforms going bankrupt. Its impact on eroding trust in this industry has become the key debate in the global fintech space.
On the other hand, success stories rarely make the news. There are P2P lenders in the US and UK who have performed well for over a decade. Even in China, some have emerged victorious despite growing mistrust. Thailand is fortunate to learn from these experiences to make sure we get off on the right foot.
There are key lessons to be learned from the crisis in China for all parties – those considering launching a new P2P platform, potential investors, consumer protection groups, as well as regulators.
First and foremost, how to mitigate fraud and security risks.
In China, before the recent crackdown, there were several cases of outright fraud by platform operators. Ezubao, one of the biggest players, led a Ponzi scheme that raised 100 billion yuan (nearly half a trillion baht) from investors. Many others have been taken in the same way. Regulators should have a rigorous monitoring system to prevent such scams. Investors should also be wary of the reliability of P2P platforms.
In terms of security, given the popularity of the P2P lending market in recent years, this industry will surely continue to be a prime target for cybercriminals using stolen identities to create loan requests with synthetic credentials. . Platforms that focus on cybersecurity and waterproof KYC technology will thrive without risking losses from fraud or exposing sensitive investor and borrower information. Of course, protecting the platform from fraudulent activity doesn’t come cheap. Therefore, finding the right balance between platform fees and fraud risks will be crucial for borrowers and investors.
Another key lesson is how well P2P platforms manage liquidity risk. Most of the recently collapsed platforms in China, like PPMiao (which sparked a large protest in Beijing) experienced a bank run-like leak where investors withdrew money at the same time resulting in a liquidity shock. . This can be mitigated by having a segregated fund to cushion such risk or a fund portfolio made up of some larger investors similar to the US and UK platforms.
Last but not least, we need to educate the public. Borrowing money from friends and family is a simple concept, but with a digital platform and an internet connection, P2P lending expands the reach of borrowers to access someone else’s capital.
At the same time, investors have the opportunity to seek higher returns than bank deposits. In this process, the platform has a role to play as a matching mechanism. It should have a robust and proven credit rating model that allows investors to understand risk and make more informed decisions.
Taking out a loan, especially without a guarantee, is not easy and requires in-depth knowledge of consumer credit. Positive investor returns are never guaranteed. Investors in P2P platforms need to understand the risks of this new type of investment. There is a misconception that P2P investing is very low risk. This has led investors to downplay the importance of diversification. As we have seen in China, retail investors have lost their savings by confusing P2P investments with safe deposits with promised returns; Too good to be true.
P2P loans have the potential to solve the loan shark problem in Thailand and improve financial inclusion. It could also educate the Thai public about financial investing to think about the returns on their financial assets beyond bank deposits, preparing us to step into an aging society.
No one should be afraid of P2P loans. If done right, the introduction of P2P will undoubtedly present many opportunities for Thailand. However, we must be careful. It is essential that we learn from the lessons of the past – both the successes and failures of other P2P platforms to ensure that their best practices are emulated and their mistakes are not repeated.
CEO of SCB ABACUS
Sutapa Amornvivat, PhD, is CEO of SCB ABACUS, an advanced data analytics company under Siam Commercial Bank, where she previously headed the business intelligence center and risk analysis division. She holds a BA from Harvard and a PhD from MIT. Email: [email protected]