Thanks to FinTech, fulfilling financial needs is now easier than ever before. One of the hottest industries within FinTech is peer-to-peer (P2P) financing, a business model where you can finance individuals or businesses through online services that match investors directly with P2P issuers (the party that requires financing, in this context). The concept is actually quite simple, but with the rise of P2P 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.
“P2P financing is risky and unprotected”
Every P2P 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 P2P financing, investment risk comes with substantially better returns. Not only that, you can minimize P2P 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 P2P financing is its low entry barriers. While some investments need a lot of money (like property), P2P financing is an affordable investment alternative. Some P2P platforms allow you to deposit as little as RM 100 for investment activities.
“P2P financing is not that different from crowdfunding”
You may have read articles that treat P2P 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: P2P 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 P2P financing also raises financing for individuals or businesses via multiple investors, P2P issuers will repay investors plus an extra amount that was previously agreed on.
“There is no legal regulation for P2P financing”
P2P financing may be new in the financial industry, but that doesn’t mean it has no legal regulation. Internationally, major P2P platforms have founded the P2P Finance Association to promote best practices and standards to protect investors.
Meanwhile, in Malaysia, the Securities Commission (SC) has regulated P2P financing – making Malaysia the first ASEAN country to do so. Not only that, SC itself announced six registered P2P financing platform operators in November 2016. The P2P platforms chosen by SC focus on providing SME financing to improve economic productivity. P2P financing platforms in Malaysia cannot provide personal financing.
So the notion that P2P financing is without regulation is simply false.
While no investment form is risk-free, learning and dispelling the misconceptions around P2P financing will hopefully help readers understand the industry better. Perhaps you will become interested in applying to a P2P financing platform, whether as an investor or as an issuer.