The Future of Buy Now, Pay Later in New Zealand
8 Jun, 2021
Regulation and BNPL – what is the future?
P2P lending has spread significantly since the pioneering Zopa was conceived in the UK way back in 2005.
Connecting investors and lenders to borrowers – whether it’s for personal financing or business financing – sounds like a fabulous idea, cutting out the bureaucratic middle man (almost) and enabling both parties to come together and determine mutually agreeable terms.
But, there are risks of course that come with this and, as we saw in the P2P meltdown in China, when financial vehicles are left unchecked, they can turn into destructive monsters.
This is what happened in the Chinese P2P lending scene. As a voracious consumer of new technologies, China immediately saw the great potential it held in a rapidly expanding SME economy and SME market space.
The number of P2P platforms, along with eager investors, went through the roof within the first few years of inception. As there was little to no regulation at the start, unscrupulous players took advantage of the demand, sucking up investments and bailing on their investors. The dramatic failures in returning on investments were in many cases completely intentional and nothing more than scams.
Since then Chinese authorities have clamped down hard and fast on P2P lending companies, ending the crowd lending free-for-all, though lamentably rather too late for the businesses, investors and borrowers that were left stranded and straddled with bad debt and non-performing investments.
One could argue that developing economies south of the great kingdom are coming on to the P2P party a bit late, but late is better than never and the upside of that is having plenty of references on what to do, what not to do and what can be done differently.
The importance of education
Crowdfunding isn’t a new concept, so from a simplistic viewpoint, P2P and ECF (Equity Crowdfunding) are really just offshoots of that, but with much more at stake and maybe less fun than, say, putting $10 into a random stranger’s bid to start a cat-themed café. And perhaps, because it sounds vaguely familiar and so attractive, it’s easy to skip reading the manual and proceed to press ‘play’.
What the situation in China taught us is that we should never shun the need to educate the public and businesses, even if it risks patronising business people. Do we really need to tell people ‘if it looks too good to be true, then it probably isn’t’? Apparently yes.
It’s especially important that the drive to create awareness comes from the Government (this is not the situation to rebel) because if the system isn’t aware, how is it going to protect us and hold those involved accountable?
If you can find 10 sites in your first search espousing the fantastic opportunity P2P lending is but can’t find a single mention in your respective government regulatory body, alarm bells should start ringing.
Any other conventional financing platform wouldn’t dream of providing a loan without some form of evaluation and scoring method, whether it’s using credit rating agencies or an internal scoring mechanism. Investors and funding platforms alike need to be aware of who they’re dealing with and, while the factors to be taken into consideration here may vary from a conventional bank, it’s still crucial to know as much as possible about who you will be financing.
What methodology do P2P lenders use to vet and evaluate their borrowers and investors? How do they make decisions on letting either party on board? These need to be taken into consideration, both for the borrower and investor, so they can make informed decisions and determine if they want to bear the associated risks.
Regulation is a good thing
Regulation is often thought of as a hindrance to freedom and progress, but when there is none whatsoever, things can get quickly out of hand, as we have witnessed in China. The key here is to ensure that regulation does not equal strangulation. The challenge is to ensure that a balance is struck between facilitating platforms such as P2P while ensuring that adequate controls are put in place to avoid a catastrophic meltdown, and that they are open to regular review and continuous improvement.
The silver lining is that in SouthEast Asia, markets are stepping into the game with caution and lessons learnt from their Asian ‘tai kor’. Leading the way are Indonesia, Malaysia, Thailand and Singapore, all of whom have set stringent frameworks around P2P platforms right from the start.
At the height of China’s P2P downfall, Malaysia’s Securities Commission announced a regulatory framework that spelled out the registration prerequisites for P2P platform hopefuls, including having in place a risk-scoring system, transparency measures and restrictions around where monies are managed.
Malaysia became the first ASEAN country to introduce such a framework within the first few years, allowing only a handful of platforms to be registered through invitation by the Government in stages. By taking the slow and steady approach, emerging markets are taking stock of the teaching moment that was China’s horrendous P2P experience and establishing a solid foundation upon which due diligence is adhered to and investors and borrowers alike are protected.
If you would like to find out more about how we have assisted P2P lenders in multiple markets or to speak to us, please get in touch.