Investor Guide To Alternative Lending Regulations. Part 3
This article the following topics, and aims to provide some clarity to potential investors into the alternative lending market.
- China
- USA
- UK
- Asian markets
- The risk of over-regulation in Asian markets
- Blockchain as an alternative to regulation
- Conclusion — what to look if you are investor
THE RISK OF OVER-REGULATION IN ASIAN MARKETS
Regulations in some countries may force small players out of the market and prevent new ones from entering. Some examples include:
- Lenders must register as “Recognised Market Operators”, have capital of approx $1.2m, and demonstrate ability to run a professional, fair and transparent system, including qualified directors, sufficient IT infrastructure and an efficient risk scoring system. All funds from investors are to be placed in third party trust accounts and full disclosure of all transactions is required. Special regulations apply to the issuing of Islamic investment notes.
India:
- Some of the regulations proposed for India include registration as non-banking finance companies, minimum capital requirement of about $320 000, reporting on delayed or default payments, a cap on interest rates and having an experienced financial person on the board.
- The larger, more established lenders in India, like i-Lend and Faircent, believe that having formal regulations brings clarity and makes the industry more attractive to institutional lenders, especially VCs.
China:
- The impact of regulation was noted earlier. In addition, the trend towards third party partnerships and institutional investors disadvantages smaller businesses.
BLOCKCHAIN AS AN ALTERNATIVE TO REGULATION
Some of the problems in the online lending industry include:
- High costs. APRs can be very high — with reports of 50% — 300%. The biggest problem is that borrowers are too often unsighted on the total cost.
- “Double dipping”. Repeat borrowers may be double-charged when loans are renewed
- Hidden charges. Finance charges may be fixed, and borrowers may be unaware that there are no benefits for early repayment of loans.
- Broker incentives are not transparent
- Stacking: Borrowers may accept multiple loans layered on top of each other. Improved data collection and coordinated reporting could minimise it.
It is clear from this list that poor disclosure and lack of transparency are at the root of these problems.
Some argue that regulation is the only way to solve them. However, another approach may be to properly make use of blockchain technology.
- Accurate and immutable transactions are visible to everybody.
- Smart contracts are drawn up at the start and are implemented automatically.
- Blockchain transactions are digitally-based and in near-real-time, so lenders can retain their competitive advantage of fast and efficient loan processing.
- The trustless environment eliminates the need for third-parties and improves efficiencies.
This would require cooperation from online lenders. However, it seems possible that this industry, which is itself innovative and technology-driven, could embrace blockchain technology, and create a networked, trustless system.
CONCLUSION — WHAT TO LOOK FOR IF YOU ARE AN INVESTOR
First, choose a country or region. The most supportive environments, with the highest growth potential, seem to be in Asia, and particularly in countries such as Singapore.
Second, find a startup or established company that will ride out the regulations, maximise regional advantages, provide transparency and deliver sufficient returns.
An interesting start-up that might meet these requirements is WishFinance. It is based in Singapore, with plans to expand into other Asian and European countries.
- It is in the balance-sheet segment of the market
- It recovers loans through direct access to POS payments and insures every loan against borrower bankruptcy
- It has the required IT infrastructure and risk scoring systems
- It has set up third party relationships with POS data providers
- Interest rates are set at 24% APR.
- Most importantly, the entire business is set up on blockchain technology to ensure transparency and efficiency, regardless of what the local regulations are.
