Dealflow, scalability, and trust – a P2P crowdfunding startup is a 3 legged stool, without one of these, it risks a collapse. P2P crowdfunding has been a relatively recent phenomenon in Singapore, with the first platforms that are still operational having started in 2014/2015.
There were companies before that – like ApexPeak that was founded in 2012 and was doing fantastically well initially, until it suddenly vanished from the radar three years into its operations. For simplicity, this blogpost will only talk about P2P Lending and Invoice Financing platforms (“platforms”), due to the specific nature of other businesses such as equity and real estate funding platforms.
The total amount that has been financed by the most active players in the p2p lending/invoice financing in Singapore is still negligible compared to the total debt/invoice financing market, though some of the companies have reached a monthly financing volume of several million SGD.
Not all players publicise their total loan book statistics, but of the ones that do, Capital Springboard claims to have financed around SGD160Mn, Capital Match SGD44Mn, Invoice Interchange SGD17Mn and Validus SGD22mn – all commendable for startups, but a drop in the ocean compared to the overall funding market that is estimated at SGD633Bn by the MAS in May 2017 (total loans and advances incl. invoice financing to non-bank customers). My top three challenges these platforms face below:
1. Dealflow – Gaining traction and proving the concept
Lining up a decent quality dealflow and attracting companies that are stable will be the main challenge that the platforms face. Two things are required for this, first, the interest rates of between 10% – 40% annualised need to decrease to become competitive with those of established financiers. Those rates are good to compensate yield hungry investors for the risk, but are difficult to sell to companies with a stable outlook that might be able to access bank financing at a lower interest rate.
Second, platforms need to increase the organic inbound leads and automate the onboarding of new clients. Hence, the challenge is to compensate investors adequately for riskier loans, while making the interest rate attractive enough for SMEs to see P2P Funders as a strong long-term partner, and to decrease the customer acquisition cost.
- Pipeline sourcing
There is low awareness among Singapore’s SMEs, and hence, Business Development requires additional time to educate and explain them. There are two main BD strategies that are used to onboard new clients – offline or online initiatives. The offline initiatives are typically led by an active sales team, including partnerships with loan brokers that act as the middle-men between the SMEs and the platforms. The advantage of this strategy is the direct access to SMEs, even the ones that are not tech savvy.
The obvious disadvantage is that having a big sales team and paying a middle-man leads to very high customer acquisition cost for the platforms; and high financing cost for the SMEs that use the services. Online business development is the passive method of tech savvy customers finding your platform and signing up without being approached. The most “organic” type of customer. This is still only a niche, as many SMEs are not yet aware of this financing option and very few submit their information online. Furthermore, most platforms are not ready for this kind of automatic onboarding and the process typically requires a significant amount of manual checks and data input, with the tech development lacking behind.
- Credit Assessment Capability
Platforms need to implement a risk based pricing approach that is replicable and scalable. Most platforms claim to use their “proprietary credit assessment” that is a combination of qualitative and quantitative assessment of the financial and non-financial situation of the business coupled with the use of external reports by companies such as DP Group and Dun & Bradstreet.
This has several pitfalls – first, the quality and usefulness of this approach depends on the experience and expertise of the in-house credit assessment team. Also, none of the platforms publicise details of their score list and the individual weightage of the assessment criteria and external reports are often outdated and focus on financial statement and general industry analysis only, instead of more up-to-date criteria such as bank statement analysis.
Finally, the quality of the information provided by SMEs is important and it requires experience to assess the financial situation of companies that are often not required to have audited accounts. And even if the platform has the right expertise to adequately assess the information provided, there is always a risk of fraud by the company seeking funding. These are problems that all financing providers face as well, but Fintechs in particular should focus on developing an expertise in credit assessment methods that focus on current data and fraud detection.
2. Scalability: Making the business viable in the long run
Once a platform has been able to implement the right processes, scalability is critical for the long term viability and also mostshareholders. Three items that need to be considered by businesses are mentioned below.
In the future, P2P financing platforms in Singapore need to automatically connect their systems to the ERP (enterprise resource planning) system providers to extract up-to-date data on the companies directly from there. Although the government is actively supporting the digitalisation efforts of SMEs with programs such as SME Go Digital, the majority of fund seekers are still onboarded offline.
Also, particularly smaller companies often submit their company documents offline – which leads to an increased work load for the platform that has to scan/store/extract and analyse the data. In addition, data that was printed out and scanned again is more outdated than data that is collected directly from an accounting software solution. However, many SMEs do not actively use accounting software providers such as Xero, Quickbooks or smaller players like BiTS and if they do, these platforms are not yet connected to the systems of the P2P financing platforms (with some exceptions).
- Chose business model that enables scaling
There are three main business models: On-balance sheet financing (traditional financing method); the Hybrid Financing Model (mix of on-balance sheet and P2P crowdfunding) and the Pure P2P Financing Model. Ultimately, the Hybrid model enables quicker scaling, as the company can directly invest in larger loans/invoices, if the investor’s funds are insufficient.
- Expansion abroad
Once platforms have established operations in Singapore they need to think about expansion – within Singapore by diversifying the product range, or outside of Singapore by entering other countries. For the second approach, companies will have to familiarise themselves with different legislations, language and cultural and geographic differences towards financing. Plus, they will require sufficient resources that are necessary to deal with the above.
3. Trust: Ensuring stable operations
Lastly, Fintech is ultimately about offering a financial service and therefore, trust is paramount. Many Fintech companies are still young and have not established a track record. Becoming a player in the P2P Financing sector requires staying power and a sufficient amount of capital –
- Hiring and keeping the right talent
Pay people near what they could earn at banks or compensate with equity! People with the right background are difficult to find as banks still offer comfortable packages. P2P financing platforms need to offer adequate incentives such as equity and competitive salaries to the banking sector, for employees that have the relevant experience and expertise in the financial sector.
- Funding for tech (FinTECH)
Fintechs that survive will need deep pockets to continuously update their tech. Banks spend more than 6% of revenues on tech development!
Without this, tech becomes the single largest bottleneck to scaling, and you can no longer hire the right people or sign long term funding contracts with clients. Instead, you end up throwing 3 people manually at a problem that should have been solved by automation.
For example, as a small company, we had to manually remind borrowers when and what amount they had to repay, as opposed to a simple investment in an automated reminder tool. Other platforms have received significant funding, with Funding Societies leading with a Series A round of SGD10Mn in 2016, and the more recent Series A funding of Validus which received SGD4Mn – a comfortable amount to invest in their tech development.
- Obtaining the right licenses
The Monetary Authority of Singapore (MAS) is intense, thorough but very reasonable! You must do your homework before approaching them or starting ops. They have introduced a license requirement for P2P Lending platforms in June 2016. After this, P2P Lending companies that also cater to retail investors were required to apply for a Capital Markets Services License for Dealing in Securities with a base capital requirement of SGD500,000 and the requirement to maintain a security deposit of SGD100,000 with the Monetary Authority of Singapore (MAS).
If you have any take-aways, remember this following – automate through in-house tech development and partnerships with ERP providers, get a great team in place that understands the importance of strong foundations for Fintech companies, and spend what might seem as a disproportionately large amount of time at an early stage to educate SMEs on the concept to develop your dealflow pipeline!
Are P2P Lenders in Singapore eating the banks’ lunch? Not just yet – for now, they are only having a nibble.