Exploring the Potential of Peer-to-Peer Lending in Indonesia

Fintech markets are becoming increasingly popular and P2P lending forms an important factor within them. The fintech market is gaining traction and P2P lending is a major component of it. Indonesia is renowned for its large and growing middle-class population, with mobile phones and the Internet having a high penetration rate. The National Statistic Agency (Badan Pusat Statistik/BPS) predicts that by 2020, the Indonesian population is anticipated to reach 270 million. Additionally, it was reported that 65.5% of households have access to or use cellular phones. This growth in internet users and penetration will be advantageous for the development of the Fintech market in Indonesia. Fintech can be defined as the utilization of technological advances to generate value in the financial sector. In 2020, Sahay et. al. stated that Fintech is the application of innovative technology in the financial services which can lead to a new business model, application, process, or product that will have a substantial effect on the financial sector. The online lending industry in Indonesia has seen considerable growth, with December 2022 figures showing that the amount of disbursed money through P2P Lending had increased to Rp 528 trillion. During 2022, the sector had a 45% year-on-year growth, with a total of Rp 225.6 trillion being disbursed. The industry is further comprised of 102 licensed P2P platforms, with 95 based on conventional protocols and seven sharia-compliant. Bank Indonesia and the Financial Services Authority (Otoritas Jasa Keuangan) are in charge of governing the Fintech sector in Indonesia. The AFTECH and AFPI are two organizations which advance the development of Indonesia's Fintech industry. AFTECH has categorized the different types of Fintech that is expanding in Indonesia, including: At the end of Q2–2020, data from AFTECH reveals that 366 Fintech firms have affiliated with the association. This includes 102 online loan businesses, 84 digital finance innovators, 39 payment system operators, 5 capital market companies, 4 digital asset Fintechs, 13 technology partners, 6 financial institutions, and 113 other firms. Employing Fintech for Economic Rejuvenation The Indonesian Government has employed Fintech companies to deliver economic aid to people and Micro, Small and Medium Enterprises (MSMEs) affected by the COVID-19 Pandemic. Compared to traditional financial institutions, Fintech firms are more flexible in providing financial services to MSMEs. An amount of Rp20 trillion was allocated in 2020 and the same budget has been allocated for 2021 for the Kartu Prakerja initiative. This program involves distributing the cards to the displaced workers who have been impacted by the crisis. Those who obtain the card can access education courses to equip themselves with more entrepreneurial skills. In order to take advantage of the entire scope of benefits provided by Kartu Prakerja, cardholders must possess a digital account to make payments towards the tuition fees. The Deputy Governor of Bank Indonesia, Governor Sugeng, declared that 52 Fintech firms have established measures to assist small and medium-sized enterprises (MSMEs) to stay afloat amidst the COVID-19 Pandemic, such as reducing interest rates, lowering transfer fees, merchant discount rate arrangements, and offering training. 2. Peer-to-Peer Lending Methodology The process of peer-to-peer lending involves a lender and a borrower. The lender offers funds to the borrower at an agreed-upon interest rate, and the borrower makes payments to the lender until the loan is fully repaid. The process is facilitated by a platform which connects lenders and borrowers, facilitates the application process, and monitors and manages the loan throughout its term. The recent proliferation of the financial industry has drastically altered people's perception of financial technology. This dynamic sector has become the most influential, partially due to a decrease in trust in financial service providers, which has generated a surge in peer-to-peer users. Fintech is heavily reliant on the latest advances in technology, from the internet, cellular services, sensors, and platforms for the development of software applications to big data analytics and optimizing business procedures. P2P Lending is broken up into a few steps, the first being users deciding to either borrow or lend money via the platform. The platform itself is then concentrated on providing superior quality, info, and structural assurance. There are a few aspects that may influence the take-up of P2P Lending such as information credibility, safety, subjective rules, risk understanding, user contentment, and dispositions. The P2P Lending process also entails a risk assessment stage. In some cases, an asymmetrical problem can arise due to the influence of individual credit information on the assessment, leading to the possible cancellation of the application. To rectify this issue, the developers resorted to turning to an internet credit services company, because of its value volume, predictability, variety of services, and privacy protection. The Lee and Lee (2012) study explored the behavior patterns and credit on trust in a peer-to-peer (P2P) lending market. The P2P model offers a fresh approach to how people conceive of and manage finance. A procedure model of peer-to-peer (P2P) borrowing encompasses all of the steps involved in this type of transaction. It involves the borrower making a loan request, which is then assessed by a P2P lender, and a credit decision is made based on the borrower's creditworthiness. If approved, the loan proceeds are sent to the borrower. Once the loan is repaid, the funds are then paid back to the lender. The use of Peer-to-Peer Lending entails a distinct process which could be visually depicted in a Business Process Diagram. This method, known as Policy-Driven Process Mapping (PDPM), could help technical and business users simplify and better understand the underlying management process. When submitting an application for a loan, borrowers must complete the 6 steps of the process: Application Stage, Acknowledgement, Credit Assessment, Approval, Assignment, and Loan Management. The P2P Lending Platform offers two possibilities: being a lender or a borrower. Individuals who want to borrow must start by registering their data and specifying the amount they require. The platform will then give advice on how much money they stand the chance of receiving. However, before getting the funds, the borrowers need to prove their credibility. By uploading the required documentation, the system will assess their credit worthiness and decide whether the loan can be granted. If successful, the funds will then be deposited in the borrower's listed account. The process you must go through to apply is fairly straightforward. Submitting an application is a relatively simple procedure. Following the steps is the best way to make sure your application is received. The six steps involved in the process of applying for a loan in P2P Lending are Registration of Data, Data Management, Investment Proposal, Credit Rating Analysis, Legality Check, and Finalization. At the initial stage, users must register with their data. Once the company/platform receives the data, the system will start operating the data/loan and recommending potential investments. At the same time, Credit Facility Management will analyze the user's credit data to determine the credit-worthiness of the user. If the user meets the necessary criteria, the user will acquire the agreement and go through the bidding process. Upon successful completion of the legal process, the funds will be transferred to the user's bank account.ed The process has been acknowledged. At the initial stage, potential lender and borrower must sign up by providing data such as identification details, banking account information and personal information. This is where the credit assessment is performed. Upon the user finishing the registration phase, the information will be confirmed. If the details are suitable, the system will process the data across two phases: first a preliminary review and assessment of compliance, and then a preliminary questionnaire. The process of approval must be implemented. The incorporation of an approval process is necessary. The process of approval is divided into 7 stages. Once the data has been provided, the following step is to gain approval of the data. The platform will put in place a repayment guarantee and assess compliance. The system will examine and confirm the data to receive approval. If the checked information is accepted, borrowers will be assigned and can move forward to the next stage. A problem in P2P lending is the potential for fraud. There is a danger of deception in the process. A potential solution is to implement strict rules and regulations regarding P2P lending. Additionally, systems should be put in place to monitor and verify the information provided by borrowers to lenders. A major challenge in P2P lending is the risk of fraud. The possibility of deceit is a real concern. One potential way to address this problem is to establish rigorous regulations and guidelines associated with this type of lending. Furthermore, measures should be taken to supervise and validate the data given by borrowers to lenders. The P2P Lending platform poses problems related to loan details, financial standing, credit score, and personal data. Issues such as deception, money laundering, and shadow banking must be addressed. Governments are being called upon to implement policies and regulations to combat these issues. Several techniques have been developed to tackle such problems, such as Machine Learning Algorithms, Feature Selection, Algorithm Light GBIM, and XGboost. The P2P Lending platform also faces difficulties regarding repayment of loans, lack of risk control, and lack of punitive measures for overdue payments. Guidelines for borrowers' payments and methods need to be established. Information asymmetry, where one party has more information than the other, can also occur in transaction processes. In comparison with traditional lenders, Peer-to-Peer loans offer a variety of benefits for both borrowers and lenders. The second issue is to ascertain the borrower's score and to assess the efficacy of the credit rating model. Testing can be performed with various methods such as Machine Learning Algorithms, Feature Selection, Profit Scoring, Score Matrix, Decision Support Systems, Decision Tree, Hybrid Random Walk Approach, Random Form, etc. The issue of unreliable creditworthiness has been reported since 2016 due to a moral hazard. To remedy this, the P2P Lending platform must develop better credit score predictions. The fifth issue discovered is regarding regulation and strategy. P2P credit platforms first appeared in 2006 in China, yet were not suitably regulated. The concluding problem encountered by P2P Lending platforms is the feasibility of the system. The sector had particular requirements which had to be fulfilled. Another difficulty is the investing decision. Abnormalities, such as herding behavior, demonstrate how investors can be driven to investing action if news of positive reports and intense selling turns out to be adverse. In order to create successful technical solutions, the developers behind the P2P Lending Platform must be aware of and implement various modules. To ensure that the web and applications are user-friendly, P2P Lending Developers must design them with simplicity in mind. P2P Lending should emphasize multiple areas in order to realize its greatest potential as a lending platform. Digital Lending is already causing a shift in the way it does business. Banks are now viewing SME Lending as a digital priority, a move which could prove challenging for P2P. Banks are introducing new advances such as improved customer experience and added digital products to their offerings. In terms of lending innovation, Banks are focusing on digitizing credit proposals, automating annual reviews, and automating data aggregation. For its part, P2P Lending should strive to improve risk management, digitization, technology use, AI in the KYC process, and analytical capabilities.

Source: https://medium.com/@angelinadessyw/the-challenge-of-developing-peer-to-peer-lending-in-indonesia-c50f445d63a4?source=rss------fintech-5