P2P crowdlending: Investors should approach with caution

The increasing popularity of peer-to-peer (P2P) crowdlending makes for a fine example of how financial technology, or fintech, is radically changing the banking scene, making business loans available expeditiously.

So fast, in fact, that it is a little disconcerting, as it brings to mind the sub-prime loans that were made available with quick ease and that precipitated the global financial crisis of the previous decade.

Before getting swept up by this latest fintech fad and diving into the heady world of high-interest-rate returns offered by this fintech-enabled, P2P crowdlending phenomenon, would-be investors should probably factor in survivorship bias and approach this new lending phenomenon with caution: For every successful business proposition out there funded by P2P crowdlending, there is scant data about how many have defaulted and left investors high and dry.

P2P crowdlending also seems to be taking place without much oversight by the Monetary Authority of Singapore. If anything, P2P crowdlending appears to some extent to be circumventing the relevant safeguards in place.

For instance, P2P crowdlending platforms limit loan tenures to no longer than 12 months to avoid having to issue a prospectus, which is an otherwise important source of information for investors to assess investment risk. That any due diligence would have already been performed by the P2P crowdlending platform is a poor safeguard against the investment subsequently turning bad, and is a lazy man’s excuse for placing blind investment bets.

While I appreciate that P2P crowdlending could be a financial saviour to those businesses that have for various reasons found it challenging to access bank funding and for which raising funds through bond issuance is prohibitively expensive and hence not feasible, I would suggest that would-be P2P crowdlending investors go in not so much with the promise of high returns in mind but, rather, with their eyes wide open and see themselves as pioneers who are contributing to developing an ecosystem in Singapore that empowers innovators and entrepreneurs to become the next Sim Wong Hoo, Jack Ma or Mark Zuckerberg.

If the investment pays off with handsome dividends, all the better. Until then, I would opine that “caveat emptor” be everyone’s constant refrain where P2P crowdlending is concerned.