P2P lending faces growing concerns

Fintech innovation marred by rising delinquencies

By Park Jae-hyuk

The nation's peer-to-peer (P2P) lending market has been losing its credibility, due to a snowballing delinquency rate in the industry and alleged investment fraud involving some well-known companies.

The series of unfavorable factors are feared to disrupt the Financial Services Commission's (FSC) bid to promote this new type of financial service based on fintech.

P2P lending refers to the practice of lending money to individuals or businesses through online services that match lenders with borrowers.

The financial regulator has been preparing for the enforcement of regulations regarding the business, slated for Aug. 27.

The new rules will obligate P2P lending firms to register themselves with the financial authorities, so as to encourage "mid-range interest rate loans" for borrowers with lower credit, which have been in "regulatory blind spots."

Investors who lend their money through P2P lending platforms, however, are still casting doubts on the soundness of this business model.

According to the Korea P2P Finance Association, the delinquency rate of 45 P2P lending firms stood at 9.32 percent on average in late January, up from 8.43 percent a month earlier.

The average delinquency rate was 0.42 percent in late 2016, when P2P lending was first introduced here.

Larger players are no exception for the deteriorating soundness.

Tera Funding, which has cumulatively extended the largest amount in loans of 1.4 trillion won ($1.1 billion) through the platform, had a 17.48 percent delinquency rate in late January, up 4.51 percentage points from a month earlier.

The company recently wrote off loans worth 10.2 billion won offered to multiunit residential buildings in Taean, South Chungcheong Province, and Paju and Goyang in Gyeonggi Province, by selling them at bargain prices. As a result, it suffered a net loss of 2.39 billion won.

The delinquency rate of the runner-up Honest Fund, which has cumulatively extended loans worth 770.9 billion won, rose to 6.23 percent from 5.83 percent.

In addition, 8percent, another P2P lending company, lost 28 percent of its investors' money which was collected in the form of crowd-funding to produce a musical.

Furthermore, some companies are facing allegations of fraud.

The Financial Supervisory Service recently asked the prosecution to investigate Popfunding, after uncovering possible fraud and embezzlement during an inspection in December 2019.

The financial watchdog suspects the P2P lending firm cooked its books to conceal losses.

The investigation over Popfunding shocked the P2P lending industry as the company was recognized as an example of financial innovation.

In November 2019, FSC Chairman Eun Sung-soo visited a warehouse Popfunding owns to praise the company's efforts to boost loans on movable assets.

Financial Services Commission (FSC) Chairman Eun Sung-soo, front row right, poses with participants in an open forum on the peer-to-peer lending business at the Korea Chamber of Commerce and Industry headquarters in Seoul in this September 2019 file photo. / Courtesy of FSC

Dilemma over regulations

Against this backdrop, calls have grown for the financial authorities to impose stricter regulations on P2P lending firms.

"P2P lending should not be legalized," a local investor said.

"It's like a gambling, because firms lure investors with high interest rates without guaranteeing their return. You should not invest in P2P lending firms."

Hansung University economics professor Kim Sang-bong also warned of the risk of losing money, saying, "P2P lending firms lend money to those with bad credit, so it is natural that their delinquency rate remains high."

The FSC chairman, however, has been skeptical about stricter regulations, because it may hinder innovation in the financial industry here.

"There exists criticism that the delinquency rate of P2P lending firms is rising, and we are facing a dilemma over the intensity of regulation," he said in a Feb. 19 press conference.

"However, we should continue financial innovation and integration."

The financial regulator has come up with several measures for investor protection instead.

It will select an institution in the second half of this year and task it with managing limitations on investments and collecting information related to P2P lending.

A self-regulatory organization will also be created in the second half.

The FSC expects the enforcement of related laws in August will prompt underperforming companies to shut down and improve the soundness of the P2P lending market.

"It is probable that the market will be reorganized as investors will flock to companies that have proven ability," said Kwon Dae-young, director general of the FSC's financial innovation bureau.

Experts noted that both firms and investors should take responsibility for any possible risk.

"Even if P2P lending becomes legalized, the intensity of regulations should be minimized for fintech firms to innovate themselves, so P2P lending firms should make efforts in advance of legalization," said Lee Soon-ho, a research fellow at the Korea Institute of Finance's digital finance research center.

"Investors should comply with guidelines and engage in transactions only with firms having proper business policies, if they want to enjoy the benefits from innovation."