Thanks to FinTech, fulfilling financial needs is now easier than ever before. One of the hottest industries within FinTech is digital financing, a business model where you can finance individuals or businesses through online services that match investors directly with the issuers (the party that requires financing, in this context). The concept is actually quite simple, but with the rise of digital financing’s popularity over the last few years, misconceptions on the industry have spread. Here are some of the myths we often hear, along with the facts.
“Digital debt investment financing is risky and unprotected”
Every digital financing business has different security systems and assessment processes, but one thing remains the same; they offer both investment and financing products. When it comes to investing, there are always risks involved – even the safer options, such as time deposits, have risks. But with digital financing, investment risk comes with substantially better returns. Not only that, you can minimize investment risks by diversifying your portfolio. Just make sure you pick a reliable and trustworthy platform, with proper governance in place.
“You need a lot of money to get started”
To be honest, we get confused when we hear this statement. One of the advantages of investing in digital financing is its low entry barriers. While some investments need a lot of money (like property), digital financing is an affordable investment alternative. Some digital platforms allow you to deposit as little as RM 100 for investment activities.
“Digital financing is not that different from crowdfunding”
You may have read articles that treat digital financing and crowdfunding as though they are one and the same. That happens a lot, but they are not the same. Here’s the concise explanation: digital financing is a category of crowdfunding.
Crowdfunding is the practice of funding a project or venture by raising monetary contributions from a large number of people. If the project succeeds, the project creator will reward investors with gifts or acknowledgements. While digital financing also raises financing for individuals or businesses via multiple investors, issuers will repay investors plus an extra amount that was previously agreed on.
“There is no legal regulation for digital financing”
Digital financing may be new in the financial industry, but that doesn’t mean it has no legal regulation. Internationally, major digital financing platforms have founded the Finance Association to promote best practices and standards to protect investors.
Meanwhile, in Malaysia, the Securities Commission (SC) has regulated digital financing – making Malaysia the first ASEAN country to do so. Not only that, SC itself announced six registered SME digital financing platform operators in November 2016. The platforms chosen by SC focus on providing SME financing to improve economic productivity. Digital financing platforms in Malaysia cannot provide personal financing.
So the notion that digital financing is without regulation is simply false.
While no investment form is risk-free, learning and dispelling the misconceptions around digital financing will hopefully help readers understand the industry better. Perhaps you will become interested in applying to a SME digital financing platform, whether as an investor or as an issuer.