In conversation with the Chief Product Manager at a Leading P2P Lending Platform in Indonesia, we tried to understand the P2P Lending Market in the country. We also discussed the significant trends and factors affecting the market's growth.
Q1) How has the P2P lending industry in Indonesia evolved over the past few years?
The P2P lending industry in Indonesia has experienced significant growth and evolution over the past few years. In 2016, when the industry was still in its infancy, people were skeptical about it. They started embracing it later, went overboard with it and now peer-to-peer lending is viewed as an alternate financing option. As more companies entered the market, the industry became more established, and people began to view P2P lending as a viable financing option.
With the increasing number of P2P lending platforms, the market became regulated and regulations were issued to ensure that the industry was operating in a safe and transparent manner. These regulations have become more comprehensive over time, with requirements for licensing, minimum levels of equity, and other safeguards to protect both lenders and borrowers.
Q2) Can you walk me through the loan disbursement process on a typical P2P platform in Indonesia registered under OJK?
On a typical P2P lending platform in Indonesia registered under OJK, the loan disbursement process typically begins with the borrower registering on the platform. Depending on the type of platform, the borrower may need to provide information about their identity, purpose of the loan, and tax documentation, among other things. Once the borrower meets the minimum requirements and their application is approved, they can open an account on the platform, which typically takes only 1-2 days, sometimes less than a day.
Once the borrower's account is set up, they can apply for a loan by specifying the amount they wish to borrow and the repayment period. It is important to note that there are usually maximum interest rates that these platforms must adhere to, which are quoted in user-friendly ways in terms of days, weeks, or months instead of annual rates.
After the borrower submits their loan application, the requested funds are typically disbursed to their internal account on the platform. From there, the borrower can withdraw the funds to their bank account.
The maximum amount that a borrower can borrow, type of financing, loan tenure varies from platform to platform.
Q3) Could you please highlight any major challenges that arise from managing a P2P lending platform, such as managing defaults.
The major challenges faced by P2P lending platforms in Indonesia are centered around educating peer lenders about the risks involved in investing, managing customer expectations, and acquiring new customers at a reasonable cost.
Many investors are not fully aware of the potential risks of investing in P2P loans, and it is the platform's responsibility to educate them. Additionally, customer management and acquisition costs can be quite high, as some investors expect high returns on their investments without fully understanding the potential for loan defaults. These lenders with their lending of small ticket size expect all their investments to be successful and to receive everything back along with the interest amount.
Furthermore, many times, lenders fail to see P2P lending platforms as a marketplace and expect them to assume responsibility for borrower defaults. In cases where a borrower defaults on a loan, some investors may blame the platform rather than the borrower, leading to brand image issues and potential compensation issues.
Q4) What do you believe are the primary drivers of growth in the P2P lending market in Indonesia?
Basically, there are two types of lending offered by peer-to-peer platforms: productive loans and consumptive loans.
According to the latest data by World Bank, 51% of Indonesian adult population is unbanked or don’t have access to even basic financial services. This presents a significant growth opportunity for productive lending via P2P platforms. These individuals are often MSMEs who require productive loans to support their businesses, and P2P lending provides a faster and more accessible means of obtaining credit. While they may eventually shift to traditional banks once they become more bankable, P2P lending remains a key source of financing for this segment of the population.
Secondly, the ease of use and accessibility of P2P lending platforms is a key driver for consumers seeking consumptive loans. P2P lending platforms that are integrated with marketplace or e-commerce platforms provide consumers without access to credit cards or bank loans with the ability to buy now and pay later. This makes P2P lending an attractive option for those looking for quick and easy access to credit.
Q5) What trends do you see emerging in the P2P lending space in the near future?
One trend that has emerged and is expected to grow in the near future in the P2P lending industry is the move towards becoming a full-fledged bank. Some successful P2P lending platforms tend to and might want to acquire majority or minority stakes in banks, enabling them to expand their offerings and provide a wider range of financial services.
Another trend is the shift from retail to institutional lending. Many P2P lending platforms specialize in certain sectors, such as agriculture or SMEs, and are able to channel funds from institutional investors who want to tap into these markets.
The future looks promising with the industry becoming more regulated, expanding its offerings, and attracting more users.
Q6) Finally, what advice would you give to someone who is interested in starting a P2P lending business in Indonesia, and what do you think is a key factor for success in this industry?
It's important to recognize that one won't be able to compete with banks in terms of serving their existing customers. Banks are increasingly investing in digitization, which may make it challenging to differentiate your service solely on user experience.
Starting a P2P lending business in Indonesia requires a deep understanding of the market and identifying untapped areas where banks are not catering to the needs of customers. Having sector-specific knowledge can give a competitive edge, and it's important to identify a unique customer group that is not being tapped by banks.
It's also crucial to keep in mind that the P2P lending industry is highly regulated in Indonesia, so having sufficient capital and technology is important to comply with regulations and ensure success.