In my view the boom of peer-to-peer social lending services has passed its peak in Japan. The reason is that the recent step down of the management at a pioneering company in this sector as well as transitioning their business model much closer to crowdfunding rather than social lending.
In the US, major peer-to-peer lending service provider Lending Club IPOed on the New York Stock Exchange in December. I visited their office at the Plug & Play Tech Center in Sunnyvale, California, and met the founders when they launched in 2006. It amazed me that they successfully IPOed and acquired a market cap equal to that of a Japanese regional bank.
What caused such a big gap in this space in the market environment between Japan and the US? Does the Japanese social lending industry have a bright future? An interesting Japanese startup called Crowdcredit runs a social lending platform bringing capital from Japan to Latin American. I recently spoke to Tomoyuki Sugiyama, co-founder and CEO of Crowdcredit.
Money demand grows, banks go conservative
As the world’s population grows, so does the demand for money. Lending money to those in need is a duty of financial services, but banks are unlikely to lend to anyone not only in Japan but also in the rest of the world. This is because of the 2010 Basel III, the global regulatory standard on bank capital adequacy. Many banks in Japan have merged and acquired each other in order to gain capital adequacy ratio, especially in the last several years.
However, in the global banking industry, there are surprisingly a number of banks with a financial solidity in developing countries. Sugiyama explained:
There are many conservative banks in developing countries, and they have financial solidity. However, even for middle-income people, which are considered to carry less loan risk, 30% of them lack access to financial services.
Despite the fact that there is huge money demand, banks collect and keep money from people but cannot lend money to them. Having an eye on this huge gap between demand and supply, many peer-to-peer social lending startups have popped up and joined the market.
A series of funds have been continuing in this sector, where UK-based Lending Works fundraised $3.5 million before its launch, and Rocket Internet-backed Lendico snagged $120 million in seven months following its launch.
Conventional banks can offer money savings but cannot do loans. That is why banks are transitioning themselves for the first time in 150 years, Sugiyama says.
Many peer-to-peer social lending services born in the 2000s have procured and supplied money in the same market. Examples include Prosper and Lending Club in the US, Zopa in the UK, and Maneo in Japan. However, wealth is unevenly distributed between geographical areas as illustrated in the North-South divide. Hence, the market with money “remaining” is not always the one requiring this money the most. In light of facilitated fund transfers thanks to Internet penetration, it is now natural to go beyond borders when investing money in markets with more demand for such funding.
Sugiyama explained that every market can be categorized to the following three types according to its characteristics.
- Procurement gap type…Markets where demand of funds is much larger than supply. (e.g. UK, Spain, Australia, Chile etc.)
- Lending gap type…Markets where supply of funds is much larger than demand. (e.g. Japan, Germany etc.)
- Developing countries type…While supply and demand of funds are seemingly balanced, the fact is that financial services are still immature there and demand for funds has not yet been apparent in these markets. If cultivated, demand will exceed supply. (e.g. most developing countries).
Among these three types, if any market of the procurement gap type and the lending gap type can be connected, this will work complementarily for both markets and result in an efficient investment. Based on this concept, many campaigns on Crowdcredit deal with funds in Japan to be loaned out to the Latin American market.
However, in view of the economic growth rate by region, we can assume that lending to the Southeast Asian market may create better results. Sugiyama shares his insight:
In Asia, there are problems in financial literacy and administrative transparency of local monetary authorities, which prevents the collection of accurate and precise information.
In view of risk management, he said that peer-to-peer social lending to the Asian market is premature.
Meanwhile, as the social lending industry is more organized, service providers are being more fragmented into two types: funding side (lender management) and deal sourcing side (borrower management). In Crowdcredit’s case, while they are focused on managing lenders and funding, they outsource deal-sourcing management to different “originators” in every market.
Crowdcredit has partnered with originators from around the world collecting projects requiring funds, planning to expand to dealing with projects from Europe and Oceania beyond the Latin American market.
We have traveled around the world, and partnered with almost all of the originators in Europe and Latin America. They also think our approach is interesting because helping them fundraise from the Japanese market creates diversifying funding sources for them.
Within the reach of everyone
Since its launch in June, Crowdcredit has only been serving institutional investors because of a limited operating license from the Japanese monetary authority. But it shifted to a full-service license in December, which has allowed them to serve individual lenders and investors with peer-to-peer social lending projects starting at 100,000 yen ($840). The Japanese government is expected in April to approve loan-type crowdfunding (peer-to-peer social lending) as to be dealt using individual saving accounts (ISA), so profits from social lending will not be subject to taxation under certain conditions.
Sugiyama shared his business plan:
Now that global investment banks and financial institutions have withdrawn from the Japanese market, we are the last generation who has expertise of what they have brought, such as margin trading or arbitrage. In the future, we want to fundraise from credit unions and established companies, and create a global marketplace for peer-to-peer social lending.
The Japanese startup economy is saturated with funds supplied, and risk money is looking for a place to go. In the conservative financial services industry, the market will push such a trailblazing team toward success unless the monetary authority conducts an unnecessary intervention.
Crowdcredit fundraised from Femto Startup just after its launch in 2013, and subsequently secured additional funding round from Monex Ventures, GCI Capital, and Femto Startup in July. Details of these investments have not been disclosed.
- Crowdfunding In Europe: The Top 10 ‘Peer-to-Peer’ Lenders (Forbes 2013/4/23)
- London Stock Exchange launches ELITE programme for high growth companies (London Stock Exchange Group)
- International regulatory framework for banks (Bank for International Settlements)