SINGAPORE (July 8): Kelvin Teo, co-founder of peer-to-peer (P2P) lending platform Funding Societies, remembers vividly the moment the owner of a medium-sized real estate management company thanked him for approving a much-needed loan. The owner had needed only a small, short-term loan that would allow him to hire more staff, as he had just secured a contract to manage a brand-new property — a big achievement for the company. He was so thrilled, he agreed to be featured in a video testimonial for Funding Societies. Teo was proud and felt that he was making an impact.
Unfortunately, some years later, the same owner asked Funding Societies to remove the video from the platform’s website. Some of his clients had heard that he received funding from a P2P platform instead of a “proper bank”, and expressed their doubts about his business because he could not get a bank loan.
“That was the moment I realised that as much as we have been actively educating the market over the last few years, there is still a lot of misunderstanding within the space. It is not that they are bad SMEs [small and medium-sized enterprises] or risky SMEs and that’s why they can’t get bank loans,” Teo tells The Edge Singapore. “It’s just that banks are fundamentally set up to support specific loans and needs, and sometimes, that does not include what SMEs really need.”
SMEs are defined as companies with less than $100 million in receipts and not more than 200 employees. They make up 99% of all companies in Singapore, but still face gaps in financing, and often struggle with cash flow problems. This is what Teo and his co-founder Reynold Wijaya are trying to resolve with Funding Societies.
“I just felt that [our] business can really help the SMEs, which are oftentimes the underdogs. They are trying to grow, but their needs are perhaps not [compatible with] the banks’ requirements of large collaterals for long-term loans,” Teo says. “Sometimes, the SMEs simply need a short three- to six-month term loan to pay a supplier or as a bridge between payments, which is where we come in as a complement to traditional banking, not as a replacement.”
Speaking on the sidelines of a recent fintech forum organised by Credit Suisse and Ernst & Young (EY), Teo, who has a Harvard MBA, says the idea for Funding Societies began in the dorms of the Ivy League school. Teo and Wijaya had met on campus, and saw P2P lending taking off in a big way in the US.
“We thought that was crazy at first. I mean, who would lend people money online?” he laughs. “[But] it was a problem that we were passionate about and invested in solving.”
For Wijaya, who is Indonesian-Chinese, his family business was nearly wiped out during the 1998 Asian financial crisis. Even after recovering from the crisis, a sudden pullout by its bank left the business with serious financing problems. “It only survived because a supplier had given it a credit line back then,” Teo says.
For Teo, feeling like an underdog for much of his life compels him to help others who may have been left behind or are underserved. Growing up in Malaysia as minority Chinese in the (then) small town of Senai in Johor, he felt limited by social constraints beyond his control. The Asean scholar declines to say what those constraints were, but it is an open secret that the quota system for higher education in Malaysia remains a thorny issue for many Malaysians.
Founded in 2015, Funding Societies helps SMEs obtain loans through its platform from a variety of investors. It matches investors to SMEs seeking loans, deploying a proprietary algorithm to verify the SMEs, analyse their creditworthiness and conduct Know Your Client and client due diligence checks. For every loan it successfully disburses, it charges the borrower a small fee, and for every repayment made, it will charge the investors a small fee as well. The interest on each loan varies according to tenure and size, but generally, it is between 8% and 16%, which, according to Teo, is higher than that of banks but lower than that of credit cards. Nevertheless, the quick turnaround time and short-term nature of the loans make Funding Societies an attractive alternative for many SMEs.
However, such loans are essentially unsecured, and are therefore risky for investors. In December 2015, thousands were cheated out of nearly US$8 billion by P2P lender Ezubao in China, making it the largest financial default to hit China at the time. As recently as this January, Hangzhou-based P2P lender Xinhehui told investors that it would not be able to make repayments on a total of RMB2.26 billion ($445.5 million), affecting more than 17,000 individual investors.
To this, Teo is quick to share that so far, Funding Societies has had no write-offs, very little restructuring and only a 1.26% default rate on all its loans. “For SME financing, we take the approach that prevention is better than cure,” he explains. “For consumer financing, you have an army of debt collectors, but we don’t have that. Contrary to the belief that fintech firms are all about tech and collect very little data, we collect as much data as banks do. We definitely make it convenient and streamlined for SMEs, but we conduct stringent checks nonetheless. It is what it is, no window dressing here.”
Preventing fraud and minimising risk are clearly important to Funding Societies. After all, the industry is no stranger to being defrauded. In June 2018, crowdfunding firm Capital Springboard Singapore was deceived into disbursing a $25 million loan to the director of Vanguard Project Management, Choy Peiyi, who has since returned about $20 million in cash and been charged with cheating. However, Capital Springboard still suffered some $6 million in losses.
So far, Funding Societies has disbursed nearly $680 million in loans, which range from as small as $5,000 to as large as $1 million, to more than 50,000 SMEs across Malaysia, Singapore and Indonesia. From just a handful of people when it started four years ago, the start-up has a headcount of nearly 400 people across all its markets. Currently, it has more than 150,000 investors on its platform, ranging from retail investors to high-net-worth individuals and organisations, including a few banks. It recently obtained a Capital Markets Services licence from the Monetary Authority of Singapore (previously, it had an in-principle licence from MAS), in addition to having operating licences in Malaysia and Indonesia. In late 2018, it obtained a Series-B funding of US$25 million, led by SoftBank Ventures.
Looking ahead, Teo feels there are still several key challenges for Funding Societies to overcome in the P2P lending space. Infrastructure support, such as access to SME financial information from the credit bureaus, is still a limitation. “Having direct access to this information would reduce a lot of friction in the process with the borrowers who are time-strapped, and also minimise the risk of fraud,” he says.
Another challenge is market awareness. The perception that borrowing from platforms such as his makes a business somewhat less trustworthy is still an issue. But having little to no financial resources for marketing is a major challenge for a start-up such as Funding Societies.
Teo is prepared for a softening of the market, and is keenly aware that Funding Societies has yet to go through a credit cycle. “I think if we address these challenges, build up awareness of our ability to get through credit cycles and access infrastructure, it will definitely be the step change from our being [a source of] alternative financing to mainstream financing,” he says.
