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P2P Financing – The Next Frontier of Retail Investment?

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Funding Societies has made impressive inroads into the Malaysian financial industry with its investor first, business friendly approach.

By Caleb Khew

The new year always brings with it hope and a positive outlook for a fresh start. This is especially true for those with investments and other financial goals that they want to achieve. With the Covid-19 pandemic showing no signs of letting up, many retail investors dove into the stock market headfirst, snapping up trending stocks like hot cakes and selling them equally fast when the tides began turning.

Alternative investments like robo-advisors, cryptocurrency and peer-to-peer (P2P) financing have also proved popular, with many attracted by the higher risk, higher reward model offered by these financial products. This is a point not lost on Wong Kah Meng, the co-founder and CEO of Funding Societies, a P2P financing platform that connects retail investors to SMEs.

“The top concerns facing investors when it comes to making investment decisions include low returns, long investment tenure, and being a research-intensive process,” he says.

“P2P financing platforms such as Funding Societies mitigate these concerns. For instance, investors on our platform can easily invest in local SMEs across various sizes and industries and earn higher risk-adjusted returns through SMEs.”

The low barrier to entry means that such platforms are easily accessible to retail investors, where investors as young as 21 years old can get started on their investment journey from as low as RM100. Users are also urged to diversify their investment portfolios in order to spread the risk across multiple small-medium enterprises (SMEs); it is for this reason that Funding Societies adopted a low minimum investment, so investors can diversify across multiple notes.

This follows the age-old rule of not putting all your eggs into one basket. Although default rates are currently low, the chance of an SME failing to fulfil obligations to investors remains due to market risks such as unemployment rates, interest rates and economic recession.

The company helps to facilitate this diversification by offering a range of investment products. These include business term financing, accounts payable financing, accounts receivable financing, and dealer financing.

P2P financing performance to date

Having first launched in 2017, the P2P financier has come a long way in a relatively short time. To date, it has disbursed over RM500 mil in Malaysia and over RM5 bil regionally while maintaining a low default rate of just 1.4% to date. Although default rates were below 1% prior to the Covid-19 outbreak, the current number is lower than the 2.3% default rate back in 2017.

Such numbers bode well for the future, especially with retail investors turning to alternative investments in greater numbers. However, Wong believes that education remains the foremost priority to establish P2P financing as not just an alternative investment, but a legitimate financing and investing platform.

“To this end, we are still pushing for public education through participations in financial literacy seminars and industry conferences with the aim to drive thought leadership, not only in Malaysia, but also across the Southeast Asia region that we operate in,” he says.

Business enablers, economic catalysts

While the barrier to entry is low for retail investors, Funding Societies holds the SMEs seeking to raise funding on their platform to a higher standard. Businesses come in all shapes and sizes from all segments, but the one thing they all have in common is strong credit history.

“80% of financing deals agreed are for a tenure of under six months as we focus on transaction-based financing, which is less risky,” says Wong.

The shorter turnaround time allows investors to get returns quicker while also balancing the amount of risk in the disbursement of funds. This is reflected in the breakdown of SMEs, where businesses specialising in wholesale and retail trading make up the majority of funding seekers on the platform, which also highlights the make-up of the overall Malaysian economy.

The keys to success

While every investment carries some form of risk, Funding Societies aims to help mitigate the risk posed to investors as much as possible. Its market-leading auto-investment algorithm was introduced as far back as 2017,
sharing similarities with robo-advisors in that users can easily spread their investments across multiple SMEs that fit their risk profile.

“Over 70% of investors have autobot set up for their account. It helps to queue on your behalf to execute investment opportunities based on parameters you set,” says Wong.

This comes in handy for investors that are busy with day-to-day activities and have no time to monitor all aspects of cash deployment, making it much more than just another fancy feature.

However, he is keen to stress that the platform also wants to ensure that investor awareness is at the highest level possible, with a detailed fact sheet provided for all SMEs seeking funding that includes a history of financial statements, write-up on the company, and risk assessment of the investment opportunity presented to investors.

“The fact sheet is available to all investors before the start of any crowdfunding. This is to ensure investors have sufficient time to study each investment opportunity and make an informed decision,” he added.

Alternative investments have long been championed as financial products of the future, but the Covid-19 pandemic is bringing them into sharp focus ahead of schedule. In the case of Funding Societies, the rate of user adoption was not stunted during this time and continued to grow, albeit at a slower pace.

“This shows how investors are now skewing towards online or digital investment platforms, such as P2P financing,” says Wong.

An impressive track record only serves to back up his claims, and being registered with the Securities Commission Malaysia also gives the platform credence among its users which include retail, high net worth, and institutional investors. It also helps that the majority of its users are on the younger side, with 80% under the age of 40. With all the progress made so far, it is not far-fetched to say that Funding Societies has arrived and is very much here to stay!

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