New lending model is a 'rival' to commercial banks

The negative psychology of customers when having to go through the complicated approval process and strict requirements of Commercial Banks is the premise for this model to become a very "heavyweight" competitor to traditional retail banks.

New lending model. Illustration

The world of peer-to-peer lending boom

Peer to Peer (P2P) lending platform is a direct and unsecured lending mechanism, helping reputable borrowers borrow money from investors without intermediaries. This is a method of connecting people with capital and people in need of capital through a new online platform with an advanced technology system. Loans are usually small (from 5 million to 300 million VND) from many different lenders, with an average term of 1 month to 2 years and an interest rate of 10% to 25%/year depending on the type of customer.

Peer-to-peer lending first emerged in the UK, took off in the US and peaked in China.

In March 2005, Zopa was a P2P trading platform, founded in the UK and considered the first P2P lending website in the world, specializing in individuals and small businesses. By 2006 and 2007, two other P2P trading platform providers in the US, Prosper and Lending Club, were born, capturing a huge market share in the US peer-to-peer lending market (about 10 billion USD).

In Asia, China is known as the first country to develop this new lending model, as early as 2007. However, it was not until 2012 that the Chinese P2P market really developed dramatically in all aspects, from the number of investors, to lending platforms and business profits, reaching about 17 billion USD in transaction turnover. However, the China Banking Regulatory Commission said that by the end of 2015, there had been more than 400 billion yuan invested by more than 3,600 P2P trading companies, and more than 1,000 of them were problematic.

What about in Vietnam?

The negative psychology of customers when having to go through the complicated approval process and strict requirements of Commercial Banks (CBs) as well as other Credit Institutions (CIs) is the premise for this model to become a very "heavyweight" competitor to traditional retail banks in Vietnam in the near future. However, in the past in Vietnam, the form of lending without going through banks has also been popular in Vietnam but not through online trading floors, for example "black" credit, pawnshops or businesses giving employees advances/loans.

According to data from the World Bank (WB), in Vietnam, less than 1 in 3 people have access to and use banking services and approximately 53 million workers have difficulty accessing personal consumer loans or small business capital. This is also an opportunity for consumer lending through the online form of P2P.

Currently in Vietnam, the forms of providing financial products have begun to develop on non-traditional channels, but the quantity is still very modest. Typically, the 0% interest installment loan product of MobiVi Company (a type of financial services company based on technology platform - Fintech) is receiving strong response from the working community in Southern enterprises and attracting large capital from 4 foreign investment funds (including: Experian Asia Pacific Company, Kusto Tiger Fund in Vietnam, Unitus Impact Company of the US and Sumitomo Mitsui Banking Corporation of Japan).

Transaction at the bank. Photo TL

Another Fintech's online peer-to-peer lending product, Loanvi (LoanVi is a product of Finsom Joint Stock Company), was established in 2015 and is in the testing phase with invited guests and will soon be widely deployed in the market. Another company called Wingoinvest is also in the testing phase. This online unsecured lending product currently has no Vietnamese Fintech company participating, but it has been sold online at financial companies.

According to statistics from the Banking Strategy Institute - State Bank of Vietnam (SBV), at the end of 2010, consumer lending accounted for only about 2.3% of total outstanding loans, equivalent to VND 16,000 billion. But by the end of 2015, this figure had increased to 6.8%, equivalent to VND 90,000 billion, of which the majority were consumer loans in the traditional (non-online) form through financial companies and credit institutions. Online and unsecured lending through P2P is insignificant and is only in the testing phase.

Peer-to-peer lending platform transaction process

This lending process usually goes through 4 common steps. First, the borrower chooses the desired loan amount and loan term, then fills in the application form on the website designed according to the available form. After receiving the loan application, the company staff will contact the borrower to complete the loan contract. Next, the two parties sign the contract and receive approval information. Finally, the borrower receives the loan through the account or at the partner transaction points of the Fintech company.

What is the future for P2P platforms in Vietnam in the near future?

Peer-to-peer lending currently has many outstanding benefits and that will help this model develop more and more in Vietnam in the future, typically:

Helping individuals and small businesses who are not eligible to access banks to access loans through P2P. Investors will receive higher interest rates than bank deposit interest rates (the average investment interest rate of the P2P platform is 16%/year, while the highest bank deposit interest rate is currently only about 8.2%/year) and borrowers will also receive lower interest rates than those of financial companies (the average interest rate of the P2P platform is from 10% to 25%/year, while the interest rate of financial companies can sometimes be over 60%/year).

The appraisal of loan applications of these Fintech companies is always carried out through a large information system and a strict control process, so it will ensure the amount of money of the investor as well as in case of risk, the P2P floors will compensate the investor and this is strictly regulated in the contract. The P2P floor also minimizes the difference in terms between capital mobilization and lending, which is a characteristic of traditional banks, because most loans are a maximum of 2 years.

This lending model is also full of risks.

The operation of peer-to-peer lending platforms in the world has not shown any major risks. However, looking at the operation and governance process of this model, there may still be some potential risks if the authorities do not control well and the operators of this business do not strictly comply with the corporate governance process.

The first risk is that after raising money from investors, the exchange does not lend money, or even uses that money for other purposes and then loses money, leading to the collapse of the exchange, similar to the bankruptcy of many bitcoin exchanges in some countries around the world, thereby wiping out the confidence of investors in this young field. Therefore, the authorities need to have regulations requiring P2P businesses to "block" undisbursed capital from savers/investors and arrange for a third party to manage the outstanding loans if they stop trading, or they can buy insurance for the investor's deposits.

Another risk is that this activity is not clearly regulated by Vietnamese law in current legal documents. Therefore, when risks arise from customers or P2P floor owners, it is very difficult for the parties to resolve them, and the authorities also lack the legal basis to resolve disputes.

In addition, the commitment content on the websites of the P2P trading floors currently being tested in Vietnam is not really detailed and the rights of customers are not mentioned when disputes occur.

In short, besides the outstanding benefits of this P2P lending model compared to traditional commercial banks such as: fast loan approval time, small loan amount, online transactions... and compared to financial companies such as: much cheaper loan interest rates, trusted and invested by large investors..., this activity also brings many risks to customers. Therefore, in the coming time, the State needs to soon issue legal regulations to effectively regulate trading activities through this P2P platform in order to help customers have more channels to choose from when needing capital for consumption or production and business purposes.

According to ttvn.vn