Reviving trust: P2P lending in Vietnam

P2P loans fill a critical gap in the country’s financial landscape, but there are still potent risks.

In Vietnam, where the economy is booming, approximately 79% of the population is unbanked. Without a banking account, it is almost impossible for people to access financial services such as insurance and loans. The phenomenon is called “financial exclusion.”

But workarounds have been developed in recent years. Though many Vietnamese citizens may lack bank accounts, they do own smartphones and have access to the internet. The country has an internet penetration rate of 67%, higher than the region’s average of 58%, and nearly three-quarters of the adult population owns a smartphone.

Overcoming financial exclusion with fintech 

Fintech developers have been quick to capitalize on those conditions to offer financial services and products to Vietnam’s unbanked consumers. The country has a relatively young population, with over 61% of its citizens falling between the ages of 15 and 54. In other words, the age group that is likely to take out loans to buy homes or start a business makes up most of the country. Vietnam is fertile ground for massive fintech adoption, particularly in peer-to-peer (P2P lending).

Otherwise known as social lending or crowd-lending, P2P lending removes the middleman from the process of borrowing money, but also carries greater risks for the creditors than in traditional brick-and-mortar lending institutions as it does not require collateral. The interest rate for P2P loans typically stands between 10 and 20%, making it attractive for people looking for investments with high returns. Since this type of borrowing does not require physical property to be pledged as security, anyone with a smartphone that is online can borrow money easily and conveniently.

The rise of P2P lending as an alternative source for capital is inevitable, and we see this unfolding in Southeast Asia at a rapid pace. The global P2P market is estimated to be worth USD 490 billion in 2020. By then, Vietnam’s slice is expected to be USD 7.8 billion, almost doubling from USD 4.4 billion in 2017 according to estimates by APAC-focused consulting firm Solidiance. At the moment, there are over 40 P2P lenders operating within Vietnam; several stand out due to their size and reach.

Consumer loans 

To understand the significance of lenders who utilize fintech in Vietnam, we must consider how personal loans were arranged before their introduction. When the country’s vastly unbanked population sought capital, they had to rely on those within their social circles, or even liaise with unregulated providers—mostly, loan sharks. The risks in that are obvious, and those who managed to secure loans were often saddled with extremely high interest rates. That situation changed with the emergence of P2P lending platforms like VayMuon and Tima.

Having only started its trial service in 2017, VayMuon arrived late to the game, but that hasn’t affect its popularity. The company caters to individuals looking for short-term small loans, with the amounts falling between VND 1 million and 10 million (USD 43 to USD 430).

As a subsidiary of the NextTech Group of Technopreneurs—a network of e-commerce, logistics, and fintech startups in Southeast Asia and the United States—VayMuon has access to large data sets and algorithms from NextTech that allow it to validate borrowers in real time. As such, loans can be approved in as little as 30 minutes, though first-timers typically need to wait up to four hours.

One of the barriers to financial inclusion is a lack of trust in financial institutions. Whether that is the consequence of a general distrust for the system or the lack of transparency, it results in people choosing not to deposit their savings into bank accounts. 

VayMuon is unique in that cash is transferred directly between the borrower and investor via a third-party payment platform that is licensed by the State Bank of Vietnam, making the transaction clear for each user involved. 

Tima, on the other hand, provides all sorts of consumer loans, from funds for students to mortgages and vehicle loans. The company has its own credit scoring system that is generated by analyzing data from the borrower’s social media accounts to determine the applicant’s credit worthiness. The company is currently valued at VND 500 billion (approximately USD 21 million), and claims to have over 23,000 lenders and close to 2.1 million borrowers on its platform. Tima recently kicked off its Series C round after successfully raising USD 3 million in a Series B round led by Belt Road Capital Management.

Business loans 

The lack of ready capital in Vietnam constrains the growth of micro, small, and medium enterprises (MSMEs) in the country, where up to 60% of companies are unable to access bank capital. With this market gap in Vietnam, many P2P lenders structure their approach to target these MSMEs.

One platform that focuses on providing business loans is HuyDong, which was previously known as Loanvi. HuyDong graduated from Vietnam Silicon Valley, a four-month incubator launched by the country’s Ministry of Science and Technology in 2014, and was later admitted to SparkLabs, one of Seoul’s most prominent accelerators. At HuyDong, loans are categorized into different grades, with grade A loans being those with lowest risk and return and grade F loans having the highest. HuyDong sets interest rates based on these grades. 

Another local platform offering business loans is Lendbiz. The company lends to joint stock companies as well as small household companies—otherwise known as micro-enterprises, which account for 74% of all businesses in Vietnam. To avoid fraud, Lendbiz has a rigorous credit rating system that takes into account over 100 criteria, which include financial and non-financial indicators. Lendbiz does not disclose details about those metrics, but it does require the borrowing company to submit its business plan when applying for loans. The company also conducts in-person appraisals to assess all of its applicants.

No regulations—yet 

Vietnam’s P2P lending landscape has also attracted foreign players of varying scales, like the Japanese-Korean Lotte Finance, which is offering consumer loans, and Indonesian startup Investree, which launched under the name eLoan to offer financing for businesses.

While P2P lending can create enormous socioeconomic benefits, it also contains potential perils and presents itself as a channel for criminal activities. That is especially concerning in Vietnam because the sector is currently unregulated.

P2P lenders in Vietnam are usually registered as investment consultancy firms instead of financial institutions. This means that these companies do not fall under the purview of the Vietnamese financial authority, giving them a lot of leeway to operate as they wish. In some cases, the firms charge exorbitant interest rates, reaching up to 70% per annum. These lending companies often resort to threatening tactics, harassment, and even violence to recover funds. 

Nonetheless, Vietnam is taking gradual steps toward regulating the sector. The government recently announced the development of a pilot program for P2P lending, and a set of official rules are expected to follow. Currently, the State Bank of Vietnam is said to be studying different P2P loan models around the world to develop a legal framework that can manage the country’s P2P sector. The State Bank of Vietnam also issued a draft circular, which if passed will see new regulations for unsecured personal loans (also known as cash loans) provided by VayMuon and Tima.

Folding in a sharing economy 

Deputy Prime Minister Vuong Dinh Hue said at a recent conference that regulating P2P lending reflects the country’s plan to foster a sharing economy, which will be an important economic development in the near future for Vietnam. Already, we’ve seen this take place in transportation, accommodation, financial services, and other sectors. Starting with P2P loans, the Vietnamese government hopes to lay the groundwork for tremendous impact on how its citizens interact with financial institutions.