TECHINASIA: Meeting Capital Match co-founders Pawel Kuznicki and Kevin Lim, it feels like they are well on their way to bridge the gap between a technology company and big finance. Dressed in button-up shirts and dark trousers, I get the feeling they’re going to advise me about loans rather than discuss setting up a tech startup. It’s a good thing, then, that they are here to do both.
Singapore-based Capital Match uses its website and technology to enable peer-to-peer (P2P) lending via crowdfunding for small and medium-sized businesses. It’s already a popular practice in markets like the US, the UK, and China, but it’s yet to catch up in Southeast Asia. Kuznicki, an economics graduate from the University of St Andrews in the UK and a former managing consultant at Rocket Internet, recognized that gap and moved to fill it. Lim, an ex-FIG investment banker who has worked with JP Morgan, Macquarie Capital, and Standard Chartered, joined soon after.
“At Rocket, I learned how to build and run a technology company, and I realized that no one is doing [P2P lending] here,” he tells Tech in Asia. “It’s a huge opportunity and a great disruption to the sector. So in the last few months when I was at Rocket, I was preparing all the basic legal and business model documentation and then at some point in mid-2014 I decided to quit Rocket and start this company.”
Making soup out of loan sharks
For small- to medium-sized enterprises (SMEs) looking to secure a loan, the process with Capital Match isn’t that much different than going to a bank, with two exceptions: one, it involves a lot more logging in to websites and uploading documents, and two, it is much more likely to succeed. According to Capital Match, 80 to 90 percent of small business bank loan applications are rejected by large financial institutions in Singapore. So the prospective borrower can either risk turning to ah long (loan sharks – never a good idea), or they can give that new-fangled P2P lending a try.
On Capital Match, the borrower can make a request for a loan and then forward all the necessary documentation to the company. Capital Match employs its own credit officer, Low Yen Chew, specializing in SME credit review and audit and with previous experience at Singapura Finance and KPMG. She is responsible for reviewing the borrower’s credit rating and borrowing power, just like a bank would.
After approval, the loan request goes up on Capital Match’s online platform, where potential investors can review it via their own investor accounts and decide whether to contribute to the loan. An investor may contribute as little as S$1,000 (US$745) or go large and cover the entire loan. The loan amounts are currently in the ballpark of S$50,000 (US$37,240) to S$200,000 (US$149,000) with a tenure of three to 12 months and interest rates of 1.5 to 2 percent per month. Once the loan has been covered, Capital Match syndicates the loan and draws up the legal documentation for all parties. Finally, the money is transferred to the borrower.
Lenders can expect a return on their investment to the tune of 20 to 25 percent per year, according to Kuznicki. And through the platform, which will allow them to select, manage, and monitor their loan portfolio, the lenders can start multiple investments. “Once we can actually prove to people that this is a fairly safe investment, or that you can diversify your investment, this becomes a very attractive fixed income product,” he says.
The law of the land
Capital Match is favored by a legal framework in Singapore that allows individuals to become lenders and investors on such a platform. Money lending in the country is regulated by the Monetary Authority of Singapore and the Ministry of Law, as well as the Moneylenders Act, preventing unlicensed individuals from exploiting borrowers in need. Kuznicki says the company has worked with both authorities in order to ensure its activities don’t fall under their purview.
“As long as we are lending only to companies, we are an excluded moneylender [under the Moneylenders Act] and we don’t need a license,” Kuznicki says. “If someone starts P2P lending for individuals, that could be tough because it’s a really grey area in Singapore from a legal point of view.”
That same framework allows anyone based in Singapore with a Singapore bank account to become a lender on the site. “Anyone can become an investor,” Kuznicki explains. “[As things stand], you can go to any company in Singapore and lend them money, you just sign a legally binding agreement.” At the moment, Capital Match is counting on the banks’ due diligence regarding a prospective lender (hence the requirement for a Singapore bank account). Moving forward, however, the company plans to start using a trust account, through which the money will be held and transferred from lender to borrower, without Capital Match interfering at all.
Chasing the debt
The thing you don’t want when you’re a lender or a loan broker is a borrower who can’t, or won’t, repay a loan (arguably, you don’t want that when you’re a borrower either but your mileage may vary). Capital Match has yet to face this problem at this early stage but if it happens, it’s not exactly planning to be threatening to break people’s legs or throw them off the harbor wall in the middle of the night. Its approach is much more professional and subtle.
For one thing, according to Kuznicki, the company can inform the relevant credit rating agencies in Singapore about a borrower’s refusal to repay the debt, with everything that entails. Secondly, the agreements are negotiated in such a way that the borrowing company’s directors personally guarantee repayment, even in limited liability companies. And then there are the debt collectors.
“We have a partnership with a debt collection company, who can chase the borrower for the money, if needed,” Kuznicki says. “This is usually a three-month process, and we cover all the necessary costs. If it doesn’t work, we then advise the lenders to start legal action against the borrower.”
Despite the inherent risk in such investments, Capital Match’s founders are currently putting money themselves into the company’s loans in order to showcase their faith in what they are doing. “So far [we] are putting personal money into each loan to show our commitment to what we are proposing to you,” Kuznicki says.
Capital Match is already off to a good start showing its commitment, having completed two loans totaling S$250,000 (US$186,000), one with an interest rate of 2.5 percent per month to be repaid over six months and the other with an interest rate of 2.3 percent per month to be repaid over 12 months.
Capital Match’s approach to the lending process is what Kuznicki feels sets the company apart from its closest competitor, MoolahSense. “We are slightly different in the sense that they focus more on the crowdfunding aspect,” he says. “They provide a video, a campaign, you can meet the borrower, etc. All of which is very typical of crowdfunding – you want to excite people with the business and then they lend the money. We believe in a slightly different idea, where we do professional risk assessment, we provide you with cash flow forecast, financial statements. Based on this, you can make your own decision on whether this company is safe to lend it money or not.”
Automating the process
Fresh off its launch, Capital Match is currently on a seed round and talking to potential investors. The funds will be used to enhance the technology behind the platform, helping it to widen the range of businesses and lenders it can work with.
“Automation can help us scale up and also offer more optimal interest rates,” Kuznicki says. “In terms of borrowers, we can talk to companies that were rejected for loans by the banks because they were still too young. If there is a good reason why they were rejected, obviously we won’t work with them either. But if we take a look at their financials, their directors’ profiles, and we see they are people we can do business with, that everything looks good, we will give them a loan.”
“In terms of lenders, our platform automation should make us more attractive,” he goes on. “Many lenders we’ve talked to feel the process of logging into the site and reviewing the various data is complicated. If we can create automated decision making for them, then they can just come to our platform once a month.” The plan is to develop technology that will not only allow lenders to get instant access to their investment data, but that will also keep track of their activity and ultimately start making decisions for them.
“What we would like to offer investors is [complete automation],” says Kuznicki. “So let’s say you put S$20,000 (US$14,900) in your name into the trust account. Whenever a loan request that fits the parameters you have set comes in, you can have S$1,000 (US$745) automatically allocated to this loan. This way you can diversify without even logging on to the platform. You can enter criteria on some companies, risk profiles, industries that you are interested in, and the money will be invested accordingly. So you still can have a say on what to do, but you don’t have to do much over time.”
As far-fetched and even scary to a less tech-savvy investor as that may seem, the company is confident it can make it work – or at least give it its best shot. Capital Match’s third co-founder, Dr. Arnaud Bailly, is a software engineer and machine learning expert, currently serving as CTO. He will be the one in charge of developing these investor tools, while at the same time focusing on the platform’s ease of use and security.
Up close and personal
For now, though, Capital Match will maintain the personal touch. Not all business owners are likely to trust a fledgling technology company with their loan, especially when they start hearing such buzzwords as “crowdfunding”.
“We expect we will still have to do physical, offline sales and relationship management for a long time,” Kuznicki admits. “So even customer acquisition will happen to a large extent offline. You have to go meet them, explain the concept to them. Some don’t even like to deal over the phone, especially as regards to submitting documents, etc. I guess we need another five to ten years before a new generation of entrepreneurs comes in, which will be more tech savvy. So for now, especially if we think about branching out of Singapore, we will still have to do sales and relationship management offline.”
If all goes according to plan, Capital Match stands to shake up the money lending industry in Singapore. But Kuznicki and Lim note that what they are doing does not take market share away from the banks. “We just create a market for ourselves, for companies who otherwise would never have gotten a loan at all,” Kuznicki says.
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