By combining discount loans with a new asset class, a group of former bankers has launched Hong Kong’s first peer-to-peer (P2P) online lending platform.
The concept is copied from the United States and Europe. Alongside online equity crowd funding, it is being hailed as revolutionising financial services, though the full benefits are likely to be limited to wealthy investors.
“The notion that you need a big building with lots of people in it is so over,” says Israeli venture capitalist Jonathan Medved, referring to the banking industry.
An early investor in Lending Club, America’s largest online lending platform, Medved sees an “unstoppable” wave that will eventually overturn the consumer and commercial loans market.
“We are not only trying to build a P2P lending platform. We want to change the way people engage with financial transactions,” said Simon Loong, the founder of WeLab, Hong Kong’s first P2P lender.
A former regional head at Standard Chartered Bank consumer lending, Loong turned his back on the corporate world after a Stanford Business School course inspired him to look at start-ups.
Dispensing with the cost-heavy model of office branches and sales staff, and by employing cutting-edge risk analysis modelling, P2P platforms match borrowers with individual investors looking for high single-digit percentage returns.
In the US for example, Lending Club has lent more than US$3 billion since 2007 and pays investors annualised returns of 5.11-9.29 per cent on high-grade loans.
Instead of making money on the spread, many platforms charge a one-off arrangement fee, leaving more margin on the table for participants.
Since starting up in the summer, WeLab has received applications for more than HK$131 million in personal loans and aims to beat competitors’ lending rates by 20 per cent.
The firm’s average loan size is HK$100,000, and borrowers need at least HK$8,000 in monthly income to apply.
Potential borrowers are directed to input key financials into an online application form. Pending background and credit checks, they will be told within 24 hours whether or not they qualify for a loan.
Loans are at present being made against the firm’s start-up capital while Loong works to find the most appropriate way to launch the investment side.
Though the firm has a moneylending licence, there is uncertainty about where WeLab sits in Hong Kong’s regulatory structure. The Securities and Futures Commission (SFC) says it needs to evaluate whether P2P lending constitutes a collective investment scheme.
The Hong Kong Monetary Authority said it is monitoring market developments, including P2P lending.
In order to raise capital from the general public, WeLab would need to get both itself and its product offering licensed by the SFC. Though Loong would not be drawn into specifics, it appears likely he will initially focus on the professional and institutional investor base, thereby avoiding the need for SFC product approval.
The popularity of such platforms has already drawn private banks and fund managers into a space originally incubated by individual investors.
“A good-quality loan that appears on Lending Club gets snatched up within three seconds,” Loong said. “Meaning that for individuals, the original ‘peers’, [it is] very, very difficult to participate, because you can’t possibly sit at your screen as a retail investor clicking refresh and refresh trying to get a good-quality loan.”
Money managers are now developing specific P2P lending trading algorithms, and in a sign of the market’s rapid maturity, P2P loans are also being securitised for institutional sales.
In May, Google invested US$125 million in Lending Club, valuing the firm at US$1.55 billion, prompting speculation the platform will have its initial public offering this year.
In September, money manager Blackrock formed part of a consortium that invested US$25 million in US-based P2P firm Prosper Club, at the same time expressing interest in lending via such portals.
Loong said one US fund manager has raised between US$300 million and US$400 million with a mandate to lend via P2P.
Lending Club bundles debts into consumer notes assigned to one of seven risk-based categories, allowing investors to tailor their portfolios. To comply with regulations, Lending Club says lending operations are handled by a regulated banking entity and investments are made through public offerings registered with the US Securities & Exchange Commission, or through a subsidiary regulated by the SEC.
In Britain, a leading firm, Zopa, has taken a different approach. Since 2005, it has lent £431 million (HK$5.54 billion). Zopa offers a 4.1 per cent net return for a three-year investment and 4.5 per cent for a five-year investment. Part of the borrowers’ fee goes towards financing a safeguard fund used to cover any defaults.
The structure is designed to enhance the “efficiency of lending, to make it safer for lenders and also to solve a tax issue around offsetting loses to bad debt”, Zopa’s spokesman Mat Gazeley said.
There are no restrictions on who can invest, although Britain’s Financial Conduct Authority has recently released draft legislation to regulate P2P lending.
At the moment, most borrowers seek individual personal loans, though the concept’s backers see the model eventually growing to support the full range of commercial loans.
P2P lending in Hong Kong “would open up [the industry]. It would allow a lot more people to borrow money”, said Stuart Northrop, director of Hong Kong-based loan provider The Money Tree Group.
“Many people want to borrow money but can’t,” he said. “For investors, people need to understand the risk and their risk appetite.”
Questions remain as to how easily investors can access their money and what happens in the event of a default. Loong said debt collection agencies would be employed to chase up unpaid loans. The level of risk to investors would partly depend upon whether WeLab loans were packaged together or sold individually.
In a cautionary tale for Hong Kong’s still embryonic industry, the mainland government is considering stricter oversight over the industry following a series of platform failures and lost investments.
Xinhua reported there were about 200 platforms in operation in 2012, with US$1.6 billion in outstanding loans. Other sources suggest the real number of platforms is much higher.
In November, the People’s Bank of China said it would consider outlawing P2P loan securitisation and place the onus on platforms to conduct due diligence on the borrower while also requiring third-party custodians to help manage transactions.