A slew of Chinese fintech and peer-to-peer (P2P) lending platforms are looking to more lenient markets in Southeast Asia (SEA), following a prolonged industry crackdown in China that has left the sector reeling.
Over the past year, China's regulatory clampdown on risky financial practices has wiped out more than half of the country's P2P lending platforms. As of May, just 900 survived, down from almost 1,900 recorded a year ago.
Many surviving platforms have decided to cut their losses and exit the space rather than attempt to comply with increasingly strict oversight. Some, however, have decided to explore neighboring markets including India, Indonesia, and Vietnam, looking for their next cash cow.
Southeast Asia is home to credit-hungry consumers who are typically left underserved as a result of limited access to loans and regulations that lack clarity. These conditions provide both an opportunity and a challenge to Chinese firms hoping to do business in the region.
"China's P2P lending industry has gotten much more strictly regulated," Johan Uddman, fintech consulting partner at Shanghai-based think tank Den Digitala Draken, told TechNode. For Chinese P2P lending platforms, it makes sense to look at markets where growth is just starting to take off, bringing their technology, know-how, and capital.
In early June, Indian daily newspaper the Economic Times reported that Chinese fintech companies, including WeShare, 9F Group, and CashBUS, are exploring investment opportunities in the country's burgeoning online lending sector, particularly in the P2P lending space.
The Indian market, like China, is credit-starved, said Bhuvan Rustagi, co-founder & chief operating officer of Delhi-based P2P lending platform Lendbox. The country also has a largely untapped retail investor base, from which lenders could potentially pool their funds.
"These are opportunities in which any Chinese player that already has experience in handling high volume and a high growth market can take advantage of," Rustagi said.
The rise P2P lending in Southeast Asia bears resemblance to the same surge that took place in China starting in 2011. A fast-growing economy coupled with a rapidly expanding tech-savvy user base accelerated fintech adoption in these markets.
Meanwhile, a lack of access to formal financial services has necessitated the rise of informal lending platforms.
India matched China in fintech adoption in 2019, reaching 87% and surpassing the global average of 64%, according to Ernst & Young's Global Fintech Adoption Index. The report's findings were based on a survey involving digitally active consumers and enterprise fintech users around the world.
There are some companies from China interested in investing in Indian lending platforms or setting up their own platforms that choose to stay put at the moment because the market is still young, and they rather wait for more regulatory clarity in the space, said Rustagi.
Chinese companies are currently entering the Indian market through acquisitions rather than setting up their own operations. However, Rustagi said he has noticed increasing communication between Chinese companies and P2P lenders in India on investment, joint ventures, and acquisition opportunities.
Nascent markets like India for Chinese P2P lenders may seem like a new haven where opportunities abound, but potential hurdles abound in the Indian market.
The country's P2P lending regulations are "more proactive than reactive" compared to China, Rustagi said. The Reserve Bank of India, the country's central bank, is reasonably receptive to stakeholders' feedback, although it has taken a more conservative approach towards P2P lending, he added.
There are other issues as well. For example, most consumers in India lack sufficient credit information like their counterparts in China, so new players entering the market will have to devise some "unconventional ways" to conduct risk assessments on borrowers, said Rustagi.
What's happening in India is also happening in other Southeast Asian countries. In Indonesia, there has been a noticeable increase in the number of Chinese lending platforms, alarming the country's regulators.
Many business practices that Chinese companies have adopted are deemed to be "moral hazards," said Benedicto Haryono, CEO and co-founder of P2P lending platform KoinWorks.
For example, some of the data mining and data collection methods used by Chinese fintech companies are illegal in Indonesia. Many recently implemented regulations came as a reaction to this, aiming to set straight business practices in the country's lending space, Haryono said.
The Financial Services Authority of Indonesia (OJK) said last year that had it blocked and warned around 500 websites and mobile applications run by illegal P2P lending services, according to the Nikkei Asian Review. The OJK reportedly received thousands of complaints about the platforms. Grievances ranged from intimidation and sexual harassment during debt collections to violation of data privacy and poor loan payments record keeping.
Indonesian officials said illegal players that come from abroad, including China, are harder to control.
Such a large, untapped market has attracted many platforms hoping to make a quick buck, Haryono said. However, most are underfunded and soon realize making an entrance is not as easy as they thought. Some better-funded early players, like Alibaba-backed fintech firm Akulaku, are thriving in the market, he said.
In Indonesia, a lot of Chinese fintech companies that have set up marketplace lending operations have adopted a balance-sheet lending model, in which lending platforms retain loans on their books, instead of selling to other financial institutions or individual investors at a discount, said Haryono.
Regulators are more lenient towards lenders that take on the financial risk and don't tap into the public's money than those that operate P2P platforms.
Signs of trouble?
Similar to India and Indonesia, Vietnam's online lending sector is on the cusp of taking off. The Vietnamese government was mulling over a decision to legalize P2P lending earlier this year. In March, the government announced that it would soon allow a pilot program for P2P lending before developing a regulatory framework for the sector.
An influx of international players from countries including Singapore and Indonesia is beginning to crowd the Vietnamese market, said Michael Sieburg, partner at Asia-focused consulting firm YCP Solidiance. But interest in the market from Chinese players is piquing, especially following the clampdown that wiped out many platform operators in China.
A report published in April by Chinese state financial news outlet Securities Times alluded to the fact that China's strict regulatory environment had driven a host of online lenders, cash loans, and fraudulent financial services operators to Vietnam.
Among the existing P2P lending services, roughly a quarter of the forty existing platforms in Vietnam come from China.
The country's economy is expected to grow at around 6.7% this year, the fastest rate in Southeast Asia. Consumption, fueled by rising income levels, has facilitated the demand for P2P lending and consumer finance, said Sieburg. P2P lending also provides an additional source of financing for small and medium-sized enterprises, he said.
There are risks, of course, as the regulatory frameworks are still in development. Sieburg said that is why the government is trying to tighten regulations, aiming to mitigate the risks while allowing the market to grow.
"Both market players and government regulators will be watchful and wary of players seeking to take advantage of regulatory loopholes in Vietnam, especially from markets that recently experienced notable risky and fraudulent practices," said Sieburg.
Sieburg said this could impact existing businesses and limit possibilities for new market entrants.
China's P2P lending market had been growing nearly unregulated for years before the government began its crackdown. As a result, the sector was plagued with fraudulent activities.
What China's P2P lending market underwent over the past years will likely prove instructive for Vietnam and other emerging markets, said Sieburg. "The government will be keen to proactively rather than reactively increase oversight to prevent fraudulent practices from impacting the market."