Monexo has launched its transparent peer-to-peer (P2P) lending platform in Hong Kong over the weekend. The Co-founder, Mukesh Bubna, enters the space with 20 years experience in consumer banking throughout Asia.
Bubna was with Citibank in Asia for 18 years, where he spent 10 years in product and marketing. Prior to that he was CFO, and going back even further built up Citibank’s entire back-end operations and technology.
“Peer-to-peer lending has all developed since 2007. It’s an industry that I would say is seven years old now, but in the last two years it’s had an exponential leap in three big markets: China, UK and US. They have amazing growth, almost doubling every six months,” Bubna told e27.
Bubna was a speaker at a Paris conference in 2005 on the future of banking. There he had the chance to meet the Founder of Zopa, now the UK’s largest P2P lending service. He was amazed at the opportunity that was emerging. Then came along Lending Club — recently IPO’d — which was confident that it would be doing a billion dollars a quarter in 2014.
As banks have become more conservative in lending generally, small businesses and entrepreneurs, — a group already sidelined — have been further marginalised. Yet SMEs are responsible for employing the majority workers in most markets and have been vital to its growth.
The UK government, just as an example, lent £100 million (US$152 million) through P2P websites in 2013. This was an attempt to fuel the economy during a time when traditional banks were still not lending.
In 2015, lenders are still only seeing returns of 0.001 per cent on capital in bank savings accounts. That’s far lower than inflation, which in Hong Kong stands at 3.5 per cent. It all ends up in equity or bonds.
P2P lending platforms are enabling lenders to bypass the banks for a better return on their capital, while also benefiting borrowers who are now able to do so at far lower costs.
“There are 1,300 moneylenders in Hong Kong, which I would love to disrupt over a period of time. They charge as much as 20-25 per cent for a second mortgage. Can you imagine a secure loan being at that rate? Or even a personal loan coming at that high rate?” Bubna said.
“Then, finally, the banks [in Hong Kong] charge 34 per cent still on a credit card, when compared to any other economy which is as developed — or even neighbouring countries like Malaysia and Singapore — their credit card interest rates are like 18-24 per cent. So Hong Kong has not moved with time in a lot of respects on interest rates,” he added.
Regulations will take time to catch up. As an example, the UK has seen a push in the P2P space since 2005, but regulations only started catching up in 2013. China was an extreme example, where 300 of the 1,100 players that came in went bust due to wrong practices. This was the result of a few things: a handful of bogus companies, and others that lacked the skills to correctly underwrite loans, meaning too many people at high risk of default were being loaned to recklessly.
Monexo screens borrowers and classifies them from M1-M8. M1 borrowers get the lowest interest rates (7 per cent per annum) due to low chance of default, whereas M8 pay higher interest (20 per cent per annum) due to higher default chance. This allows lenders to get a better yield — hopefully at around 10-12 per cent — by creating a mixed portfolio of low and high risk loans.
“We don’t have any pre-payment charges, nor do we have any upfront fees right now… Specifically compared to moneylenders, this is hugely competitive,” Bubna said.
Hong Kong has about US$70 billion worth of unsecured loans between banks and moneylenders, and it’s a quickly growing market.
“I think there will be a few more [P2P] players, but not too many. Regulations are still emerging in Hong Kong. This is a very high talent industry. This is not something everyone’s cut [out] for. You have to have a financial background, you have to run the right risks. You also have to understand the technology of the 21st Century,” Bubna said.
“If you build this on technology of the 20th Century then you are dead. You have to be very efficient because the margins are very thin. A lot of people think Hong Kong is a very small market, and that’s why they might not enter,” he added.
There is currently no license required for P2P platforms in Hong Kong. Monexo expects the percentage of loans defaulting on its platform will be in the low-single digits.
Alibaba and Google have both last week announced plans to move into the P2P space to help SMEs.
Monexo is targeting borrowers with a rental income, rather than ‘salaried loan’, which is more standard in the P2P space. For example, these are individuals who can prove they have a certain amount coming in over the next 12 months and borrow against that.
“We’re looking at a different cash flow, and that’s the first time ever in Hong Kong… A lot of the time these people are borrowing second mortgages at 20-25 per cent. I can’t help them with that 25 per cent rate on the full amount. But can I bring down their cost of debt for a small portion of amount at a much more reasonable rate? Yes I can,” Bubna said.
For borrowers with rental income of, say, US$40,000, they can borrow up to US$500,000 through Monexo.
“For me it’s a blue ocean,” he added. The platform will screen users within 60 minutes of signing up and then get them listed on the marketplace anonymously.
Bubna expects to do US$25-30 million ‘of business’ in the first year alone, but the venture won’t become profitable immediately.
One of the reasons Monexo can be seen as bringing a ray of sunshine into Hong Kong’s P2P lending abyss is because of the way they handle all the capital that passes through the platform. Rather than keeping it themselves somewhere, they have brought on board an independent custodian partner. This means Monexo cannot just run off with the money as happened in China.
The Hong Kong Trust Company will be that custodian.
“Monexo never touches any borrower’s or lender’s fund, such that if for any reason people think we can run away, we cannot. Hong Kong Trust holds everybody’s funds in a separate account which we do not have access to,” Bubna said.
This is not a regulation, but a good practice that has already taken root in markets like the UK.
“In a China scenario, that’s what happened. People gave money to the platform and the platform just ran away. So by doing this we are keeping our lenders very safe,” he added.
Getting the partners on board was no easy task. Monexo had to approach multiple trusts, but in the end the Hong Kong Trust Company emerged as the best choice. Bubna describes it as a very forward-thinking company that set strong conditions on what the platform could and could not do.
Robertsons Solicitors in Hong Kong are also on board as partners. They ensure that no funds come into the platform from overseas. All lenders on Monexo must have a Hong Kong ID and transfer any monies to the trust company from a local bank account.
“That just ensures that there’s no money laundering possible, or we’re exposed to terrorist money on this platform,” Bubna said. Borrowers must have a Hong Kong ID and a local tenancy agreement.
To kickstart the launch over the weekend, Monexo is partnering with real estate agencies and running events for property owners looking to diversify their investments.
While the startup is bootstrapped, it did receive just over US$70,000 last year when it was selected to be an incubatee at Cyberport. It is now in the midst of raising a US$2 million round from angel investors that it expects to close within 60 days.
“I think the big challenge is getting the right talent to jump ships from banks to join this sort of venture. There’s not too many risk takers in Hong Kong… We have talked with some big companies that will become our knowledge partners very soon. We’ll make the announcement once they have signed the contract,” Bubna said.
This is only the first product Monexo is launching, aimed at a targeted borrower segment. They also have ‘innovative ideas’ in the pipeline for Hong Kong SMEs, due to be launched in Q3 2015.
Eventually, the service will move beyond the Hong Kong borders to at least five or six other markets in the next three years.
“There’s no exit for me. I would love to be in this company all my life. This is my last gig. I want to raise it and see it grow,” Bubna said. The three founders are at present working for free on the startup, not taking any salary from angel investments.
Co-founder Sonal Bengani previously held various leadership roles at Tata Consultancy Services (TCS), the largest tech company in India. Meanwhile the third Co-founder, M Sundar, brings over 30 years of professional experience as a Chartered Accountant where he worked closely with leading banks.
As we wrapped up our talk, Bubna left us with a Bill Gates quote:
“Banking is necessary — banks are not.”
Throughout the struggle of realising Monexo, from conception to execution, he drew strength from Nelson Mandela:
“It always seems impossible until it’s done.”
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