[Herald Interview] P2P lending can help curb national debt with data: Lendit

The Korea Herald is publishing a series of interviews on promising startups in the fintech industry. This is the 2nd installment. -- Ed.

To a peer-to-peer lending platform, a full-grown set of database plays a crucial role in providing individual lenders or investors higher return and lower risk, and borrowers with low interest rate loans, while at the same time, better assessing borrowers‘ debt serviceability.

One of South Korea’s leading P2P lending platform operator Lendit appears to have taken advantage of its maturing big data. The accumulated volume of personal loans originated from the firm doubled in six months as of early September to some 70 billion won ($61.6 million), after some 28 months of operation.

“Back in Lendit‘s nascent day, all we could do was to persuade lenders using our own assumption,” Lendit Chief Executive Kim Sung-joon told The Korea Herald in an interview, recalling May of 2015, when Lendit began to extend personal credits, two months after its foundation.

“Now we have ample data, and based on them, we can assure borrowers of lower interest rates than savings banks.” 

The database allows an individual lender to invest 10 million won at maximum in a “customized” package composed of possibly hundreds of bonds in different interest rates, while promising the lender a return of between 6 percent and 10 percent including tax and commission fee.

After choosing one of three packages depending on the degree of risk and return and the volume of investment, the lender can adjust the volume of investment in each bond constituting a portfolio and even choose whether or not to buy.

On the other hand, borrowers taking out a personal loan of 30 million won for two years would pay 130,000 won each month on average, about half of that of savings banks, according to Lendit.

Kim, 31, believes Lendit could help mitigate the rapid growth of the national household debt, projected to have exceeded 1,400 trillion won in the third quarter. Household debt in Korea is considered a powder keg of the national economy amid looming signs of central banks ending expansionary monetary policies. Consumer loans take up nearly 20 percent of all household debt in Korea..

He underscored Lendit’s role to lower the barrier for borrowers holding credit scores between 4 and 6 on a scale of 1 to 10, by offering them “adequate interest rates for midrange borrowers.”

“Borrowers‘ better access to loans with lower interest rates will enhance the quality of household loans,” he said, adding the midrange borrowers had few choices but to see interest rates jump fourfold, from at most 5 percent interest a borrower with high credit score pays.

Moreover, unlike “one-off” state-backed loans, P2P lending industry allows loans to be subsidized by the private sector and keep the money flowing, thereby also contributing to the debt quality improvement, he added.

Lendit has created its own sophisticated model to assess borrowers’ credit scores using their longitudinal trends in credit change for the past 12 months, based on data by credit information provider NICE Information Service.

“A borrower whose credit scores gradually improved from, let‘s say 6 to 4, is more likely to benefit when taking loans from Lendit, compared to another borrower whose score dropped from 3 to 4,” he said. “In conventional financial institutions, those in the credit score of 4 would be offered same interest rate.”

Inspired by San Francisco-based Lending Club in 2014, three years after he quit a master‘s degree program in product design at Stanford University, Kim saw the P2P lending market in Korea grow from 39.3 billion won in 2015 to 1.5 trillion won as of July 2017 in terms of the volume of loans originated.

Such explosive growth entailed a strengthened set of regulations on the P2P lending platforms in Korea, including one that has barred a P2P lending platform from extending loans using their capital since August.

Kim claimed financial authorities should steer clear of such regulation. Currently, a P2P lending platform can offer loans by using lenders’ investment.

“Both borrowers and lenders would be in trouble, if a lending platform cannot itself extend loans in case there is no money left from lenders,” Kim said. “Borrowers taking loans from us need them for urgent payment within days, while lenders will not be given interest for investments.”

Kim said Lendit currently is depending on investments from local individual lenders for procurement, but was envisioning a leap forward amid market growth, coupled with Series B funding in May worth combined 10 billion won from venture capitals including Altos Ventures, which provided Lendit with seed money in 2015.

“Institutional investors or foreign investors would find it attractive to invest in Korea‘s P2P lending platform, as Korea ensures individual borrowers’ debt serviceability with centralized credit administration system,” he said.

Lendit currently only offers personal loans through its platform. In the nation where more than half of investment to P2P lending platforms goes to real estate project financing, Lendit has about 40 percent of market share in P2P personal loan market as of August, according to the firm.

By Son Ji-hyoung 
(consnow@heraldcorp.com)