The growth of financial technology (fintech) in Indonesia provides many benefits to the community, especially in relation to access to financial services. Among the existing fintech products, peer-to-peer lending (aka P2P Lending) is the fastest. The purpose of P2P lending is to provide easy access to cash/credit products by connecting borrowers and lenders — both individuals and institutions/MSMEs.
The emergence of P2P lending in Indonesia also can increase the overall financial inclusion index. With the right technology, P2P lending service providers can get loans to a wider audience, including people who have never previously received financial services from formal institutions (unbankable). One of the technologies that can be applied is Open Finance.
What is P2P Lending?
According to the Financial Services Authority Regulation №77/POJK.01/2015, P2P lending is a direct lending and borrowing service in rupiah currency between creditors (lenders) and debtors (borrowers) based on information technology. The creditor or debtor can be an individual or an agency. P2P lending is also often referred to as fintech lending, defined as an information technology-based money-lending service.
There are several benefits of P2P lending services, both for borrowers and lenders. These are some of the benefits of P2P lending for borrowers:
- Faster administration process
The entire loan application process in P2P lending is done online using a mobile application or website given to you by each service provider company. Likewise, with the filing process, or e-KYC (electronic know your customer), consumers will be asked to upload supporting documents such as ID cards, salary slips, etc. Using the appropriate technology to validate the inputs can take place in a short time.
- There is no required guarantee
P2P lending is a loan service without collateral; no goods or securities need to be guaranteed when applying for a loan. However, some information must be given, such as an emergency contact, office telephone number, or a certificate of incorporation if the loan is applied for the name of an agency that has legality.
- Various loan types
There are various types of loans provided by P2P lending, ranging from loans for individual (consumptive) needs, MSME loans, loans for online stores, invoice financing loans (purchasing supplies and merchandise), and others. Some P2P lending platforms also have specific consumer targets in selling their loans; for example, some focus on female entrepreneurs or grocery store owners.
Additionally, here are some of the benefits of P2P lending for lenders:
- Investment diversification
For lenders, P2P lending can be used as an investment instrument. A profit sharing mechanism is applied, from the loan interest that has been agreed on with the user.
- Returns are relatively high and fast
The loan tenor and return process in P2P lending is relatively shorter and faster — usually a matter of months. The interest charged is also generally higher, especially in P2P lending, which targets the consumptive sector, so the profit-sharing also adjusts.
- Easy process
All lending processes are also carried out online through the application or website provided. In the application, users can monitor the progress of funds managed by P2P lending companies. Some applications also allow lenders to choose the category/sector they want to fund.
How P2P Lending Works
As a technology platform, the P2P lending application is tasked with connecting the needs of creditors and debtors. The general way that P2P lending works are as follows:
- Whether creditors or debtors, users will register online through the application or website. Each user will also go through the e-KYC process in this registration process. Generally, users will be asked to upload a photo of their identity card and take a selfie for the validation process.
- For debtors, aka people who apply for loans, some platforms will ask to fill in some other information according to the type of product or the amount submitted. If the loan is submitted on behalf of an agency or MSME, several other files are usually required to be uploaded.
- Next, the debtor will apply for a loan according to the nominal required. From there, the system in P2P lending will also conduct a creditworthiness test by assessing several variables. Usually, the system will look at the history of various transactions to determine whether the debtor will have the ability to repay or not.
- After that, when the debtor’s data has been entered, it will be shown in a special dashboard intended for creditors. They can choose to spend their money and provide loans to debtors with certain risks or criteria. The P2P lending system will help provide analysis of the data that is easy for users to read.
- Once the debtor’s needs match the creditor’s criteria, the platform will distribute funds to the account. For information, a loan requirement can be facilitated by one creditor or a group of creditors — for productive financing projects with a higher value, usually more collective (more involved).
- Finally, the borrower will regularly make a payment, accompanied by interest according to the time tenor. After all, loans are paid off, the platform to the lender will carry out the process of profit sharing and return on investment.
However, some fintech lending also has unique criteria for the loan application process according to the products provided. For example, some fintech focus on financing merchants in online marketplaces; they will ask users to connect their marketplace accounts to view sales history. The data will be used as one of the credit assessment variables.
Open Finance Technology in P2P Lending
To improve the infrastructure and technology aspect of the P2P lending platform, developers can utilize the advantages of Open Finance to be integrated into the system. Open Finance is in a product ecosystem. The features provided can be used to specifically strengthen certain aspects of the business process of P2P lending. Finantier itself is one of the developers of the Open Finance platform that also targets P2P lending as its primary use.
Finantier has many products that can be integrated into a P2P lending service to provide efficiency in the process. For example:
- Assist the e-KYC process with Instant Verification. Finantier provides verification services that can instantly offer creditworthiness decisions by validating data uploaded in the e-KYC process and providing verification through uploaded income data. The work process on the user’s side is swift and accurate, presented with an intuitive user interface/experience, thus making the whole process run more efficiently.
- Improve the quality of credit scoring with Credit Scoring. Finantier presents alternative financial data to improve credit scoring variables. The process uses transactional data of the users (with user consent), such as PPOB transactions, telecommunications, e-commerce transactions, etc. This data is processed in seconds, including completing the assessment system obtained from the OJK SLIK.
- Facilitate payment processes with the Repayment Platform. Finantier helps the platform automate repayment systems seamlessly integrated within the application. This makes it easy for users to make repayments effectively. For business owners, this service offers a lower payment fee, 99% cheaper than the existing system.
- Provide an integrated dashboard via Account Aggregation. Finantier helps developers present a comprehensive dashboard containing the user’s financial data. The dashboard is connected to the system with various financial services the users own and turns this data into valuable insights for businesses.
The following is a workflow description of the implementation of the Open Finance platform from Finantier in a P2P lending system:
All of Finantier’s Open Finance services can be connected to P2P lending applications seamlessly through a secure API connection standardized by the regulator (in this case, referring to Bank Indonesia’s SNAP).
With the Open Finance solution that’s offered, Finantier wants to make it easy for platform owners to automate and simplify the loan process to provide a more pleasant user experience. There are three main benefits of implementing the Finantier system in a P2P lending service:
- Faster verification
- Improve rating
- Reduce risk
Open Finance service is here to help platform developers improve their system capabilities — for example, to reach micro-entrepreneurs in areas that do not have a credit history at the bank. Finantier can provide alternative data other than SLIK to help the platform perform credit scoring. That way, along with the proliferation of P2P lending platforms, they can also participate in providing benefits for financial inclusion in Indonesia.