However, unlike selling goods through cyberspace, making a loan online is more complicated because it is not the end of a transaction but the beginning. The typical operating income of a marketplace lending model includes fees earned when facilitating or originating loans. Once the loan has been made, either through balance sheet capital or crowdfunded capital, lenders then monitor the loan performance.
New capital inflow is essential for marketplace lenders to continue to scale up their businesses. Banks and private debt fund managers are among the institutions that have backed some of these marketplace lenders, either through their closed-end funds or direct investments.
In May of last year, CLSA Capital Partners invested $35 million of debt and equity in PeopleFund, a Seoul-based peer-to-peer lender, via its Lending Ark Asia Secured Private Debt Fund. The Lending Ark fund is a secured private credit strategy managed by the Hong Kong-headquartered investment firm. It was launched in November 2017, targeting $750 million in fundraising, Private Debt Investor data show.
Carol Lee Park, a Hong Kong-based managing director of Lending Ark, said in a statement in June 2019: “As a debt investor and an equity shareholder, Lending Ark is looking forward to working with PeopleFund as a strategic partner to help the company achieve long-term growth and success.” She joined the board of PeopleFund once Lending Ark had taken a minority equity stake in the firm.
Lending Ark’s vehicle previously provided equity funding of $11 million for PeopleFund’s Series B round, which was announced in October 2018. With the capital extension, total equity raised as of June 2019 was $21 million.
Another example is CreditEase. As PDI reported in 2018, the Beijing-headquartered fintech conglomerate had been acting as a debt provider to smaller marketplace lenders.
Among the institutions that have established direct working relationships, Singapore’s DBS Bank has partnered with online lending platform companies since 2016.
Two of these companies are specialists in short-term financing for small and medium-sized enterprises. MoolahSense, a Singapore-based peer-to-peer lending platform, offers secured and unsecured business loans, and invoice financing.
Funding Societies, one of the largest marketplace lenders for South East Asia, is crowdfunded by institutions and individual investors. It holds a Capital Markets Services Licence issued by the Monetary Authority of Singapore, which means its business activities relating to dealing with securities are regulated. As part of the partnership, DBS Bank introduces smaller businesses to the marketplace lenders, while the lenders refer eligible borrowers to the bank for larger commercial loans.
Among other banking groups, Goldman Sachs previously committed 324 million yuan ($45.8 million; €40.6 million) to Yiren Digital in the form of a three-year funding facility, as per a statement by the platform lender on 18 June 2018.
A closer look at Yiren Digital is helpful to better understand the headwinds that online marketplaces are facing this year. The CreditEase subsidiary, formerly known as Yirendai, has been affected by the covid-19 outbreak across China. Ning Tang, Yiren Digital’s executive chairman and chief executive officer, speaking on the latest earnings call on 26 March, said it had loosened its repayment terms to support borrowers in some of the parts of the country affected by the pandemic.
The firm’s allowance for contract assets – an indicator of its credit loss assumptions – to 588 million yuan, or 7.4 percent of loan volume from the previous quarter’s 345 million yuan or 3.3 percent of loan volume.
Its total loan volume recorded was 8 billion yuan, around 16.5 percent of which came from repeat customers. Elsewhere, the firm secured 40 billion yuan through a line of credit and held 3.6 billion yuan in usable cash as of 31 December 2019.
In April, PeopleFund disclosed that it had run stress tests on its portfolios of unsecured personal loans and mortgage-backed loans. The firm said it had revamped its risk monitoring and loan underwriting practices since March.
Regulators have taken notice. As their overarching principle is to protect investors, some of them have strengthened monitoring systems for the marketplace lending platforms in their countries.
In Singapore, peer-to-peer lending, or fundraising from the public through lending-based crowdfunding, is regulated by the Monetary Authority of Singapore under the Securities and Futures Act and the Financial Advisers Act.
In China, peer-to-peer lending platforms have to submit credit information on all their borrowers to the country’s major credit bureaus, as per a notice issued on 2 September 2019.
In South Korea, the P2P Finance Business Act will come into effect from 27 August. P2P lenders are currently classified as a type of non-bank lenders. Under the new law, P2P businesses will have to register with the Financial Services Commission and meet various requirements. The legislation also covers the scope of platform lending businesses, places restrictions on the types of products they can market, and limits the fees they can charge each loan they facilitate.
Online marketplace lenders are likely to need more licences and capital to sustain and reinvent their businesses as the industry faces the headwinds of new regulations and the uncertainty arising from covid’s impact on businesses and households.