THE SHARING ECONOMY AND COLLABORATIVE FINANCE: THE CASE OF P2P LENDING IN VIETNAM

Tran Dinh Uyen1 Hoang Ha2

1,2Duy Tan University, Danang, Vietnam

Abstract

Peer-to-peer Online Lending (P2PO) has received increasing attention over the last years, not only because of its disruptive nature and its disintermediation of nearly all major banking functions, but also because of its rapid growth and expanding breadth of services. This model offers a new way of investing in addition to investing in traditional channels such as banking or financial company. The transaction process is done online, the personal information and terms of mobilization are completely transparent and secure in the best way. The strong development of P2PO also raises a number of issues that require careful attention to promote positive and to limit negative aspects. The research aims to highlight particular aspects of this new business model and to analyze the opportunities and risks for lenders and borrowers in Viet Nam. The research combines qualitative analysis and data survey to serve descriptive statistics about P2PO in Viet Nam. The research show the potential of online peer lending is enormous but the regulators will restrict the Sharing economy model in general and P2PO lending in particular

Keywords: Sharing economy, P2P lending, financial innovation, Disintermediation, Fintech

INTRODUCTION often on a very large scale, since they are accessible world-wide. Developments in information tech- Known under different names such nology are fundamentally changing many as "Collaborative Consumption", "peer- traditional business models. The advent to-peer exchange", "on-demand eco- of the internet and the consequently nomy", this model is expected to achieve facilitated opportunities for entrepre- sales of 335 billion dollars in 2025 (Price neurial activities has given rise to an waterhouse Coopers, 2015), equivalent to enormous number of new non-traditional revenue of Traditional rental sector. businesses and business models that The model "sharing economy" has encompass the so-called “Sharing Eco- been bringing benefits such as cost nomy”. The business models of the savings, environmental protection, in- Sharing Economy are usually platform- creased economic efficiency, reduced based to match demand and supply. The social waste and excess capacity of increasing use of the internet and its service products. These are the factors possibilities enable online platforms that that make the sharing economy model are easy and cheap to access. Independent have more potential for growth in the of the rest of the design of these non- future Time magazine refers to the traditional businesses, the Sharing Eco- sharing economy as one of ten ideas nomy companies usually provide these which will change the world (Walsh platforms. These, in turn, attract demand, 2011).

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The online peer to peer (P2PO) assets with people who would like to rent lending model is one part of the Sharing those assets short-term. This model has Economy. With the upcoming popularity many economic benefits such as having a of online communities, a new way of loan positive impact on economic growth and origination has entered the credit market. welfare, stimu-lating new consumption, It transfers the old idea of personal credits raising producti-vity, and catalyzing indi- into the World Wide Web. In this kind of vidual innovation and entrepreneurship lending model the mediation of financial (Sundararajan 2014). institutions is not required (Galloway Sharing Economy companies have 2009). The decision process of loan significantly increased competition in origination is given into the hand of most markets they are active in. Even in private lenders and borrowers, and the markets that are already competitive, the website like huydong.com offers them a entry of a Sharing Economy company platform to engage with each other. causes an increase in competition that is Borrowers and lenders connect more mostly unparalleled when compared to easily, and demand for consumer loans is traditional business models. The main almost fulfilled all the motivations, bases, reason for this is that Sharing Economy and needs for promoting this model (Lenz companies often do not apply the frame- 2016) work and regulation of the respective The asymmetry between the bene- market to their activities while traditional fits of the shared economy model and the companies do. The motivation for this P2PO platform with the reality in behavior is that they believe that existing, Vietnam in this sector has prompted a pre-Sharing Economy regulation is closer study of P2PO knowledge and inapplicable to Sharing Economy com- awareness, which until now, no detailed panies, especially P2P models. The research has been done yet, to make argument being made is that the supplier recommendations to promote P2PO is in fact an individual, not a company. In platform development in Vietnam. consequence, it is reasoned that a frame- However, the researches about work of a market geared to companies Sharing Economy in general and P2PO could not be applied. Not surprisingly, Lending are very limited. So this paper traditional companies disagree and strive aim to collect and analyze the opinion of to apply framework and regulation to all the financial community about the companies (and in case of Sharing Eco- potential development of the P2PO nomy businesses to individual suppliers) platform in Vietnam and thereby try to in a market in the same way (Demary give several policy recommendations for 2015). their development. Sharing Economy companies work hard to establish trust since it is a About the Sharing Economy prerequisite for conducting business in The Sharing Economy in recent ti- this environment. The most common mes has emerged as a global pheno- avenue of creating trust is a rating system menon. Companies that are emerging in where consumer and supplier rate each this new paradigm as a David are relying other after each transaction (Finley 2013). on internet technology to compete face- What separates peer-to-peer networks to-face with the Goliath giants. These from electronic markets is that the main new companies are actually Web plat- aim is sharing and borrowing, not buying forms or Mobile application that brings (Gansky 2010). together individuals who have underu tilized

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Drivers of Sharing Economy Nowadays, they are available in a wide - Technology is the main driver of the range of countries, such as the United Sharing Economy. It makes eco- Kingdom (ZOPA), Germany (SMAVA), nomic activities easier and it makes the United States (PROSPER) or Viet them cheaper by reducing transaction Nam (HUYDONG) costs. Moreover, the customer’s Unlike a commercial bank, the networking is connected easily and platform does not take risks through its conveniently by social network and own contractual positions. Whereas banks digital market. accumulate risks by taking positions on - The advent of the Sharing Economy their balance sheet, platforms decentralize coincides with the global financial the risks by spreading them to their users. crisis. Research conducted by an The concept of private loans is not a expert team working for the new business model and rather the European Commission shows that the traditional way for private persons to loss of trust in traditional companies borrow money without any mediation during the financial crisis was a (Herrero-Lopez 2009). What makes major enabler for the feasibility of online P2P lending a young phenomenon many business models of the Sharing is the transfer into the internet using Economy online P2P lending platforms. - While technology is the main driver of the Sharing Economy, at the same The Motivation of This Model time, an aversion to web-based appli- Behind building such platforms was cations in general or insufficient to circumvent banks as intermediaries, knowledge about their possibilities which may have the following advan- and limitations are obstacles to trust tages: in Sharing Economy businesses - An expensive middleman is replaced (Dervojeda, Verzijl et al. 2013). by a more cost-effective online platform, thus reducing transaction About Peer-To-Peer Online Lending costs (P2PO) - borrowers are given the chance to A category of Sharing Economy present their loan case in much that require a different economic impact detail, providing information to and regulatory discussion is P2PO lenders that banks with their stan- lending. dardized decision processes usually “Peer-to-peer finance will challenge do not take into consideration the nation’s major financial institutions… - The loan generation process is mono-banking culture is on its way out” - transparent and creates a feeling of Andrew Haldane (Bank of England) fairness (all bids visible and traceable “This would mean revolution, online) fundamentally re-shaping the financial - Loans on peer-to-peer lending system” – (Bank of England Governor, platforms are said to generate higher Mark Carney) returns for investors (compared to Peer-to-peer (P2P) lending plat- traditional bank savings) and to be forms are online platforms where cheaper for borrowers. (Klafft 2008) borrowers place requests for loans online and private lenders bid to fund these in an Lending Process auction-like process. Such platforms Online P2P lending platforms differ became available in 2005 and have in the way the borrower’s interest rate is increasingly been used ever since. set. Sites, like prosper.com use an auction

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process (Galloway 2009) where bo- performing loans on behalf of lenders to a rrowers are able to set a maximum debt collection agent for a fixed price to interest rate they are willing to pay. recover a mini-mum amount (for exam- If the lending process leads to a ple, 15% to 30%) of the credit claim. fully funded loan-request, some platforms Others have developed automated like prosper.com have implemented litigation and recovery processes for another verification of the borrower’s when loans default. Here, the recovery ability to pay, including the verification rates are higher. of a steady income. The loan is then In a research about Peer-to-peer granted to the borrower, who will lending and financial innovation in the eventually start the repayment process UK, the authors found that generally, (Garman, Hampshire et al. 2008). loans run between 12 and 60 months, The platform conducts its own though loan agreements often can be sold assessment of the underlying credit risk. before maturity in secondary markets If the credit risk is acceptable and fits the ope-rated by platforms. The platforms platform’s risk categories, the platform typically make their profits by charging sets a risk-appropriate interest rate. various transaction fees at origination(Atz If the borrower agrees with the and Bholat 2016) . platform’s pricing, the platform publishes the offer to its users for a predefined RESEARCH METHOD period, typically two or four weeks. Requests for consumer loans are The paper combines qualitative published anonymously, while those for analysis and data survey to serve business loans are normally published descriptive statistics about P2PO in Viet with the name of the potential borrower. Nam. Firstly, the authors study the Lenders have this period to place their published works related to Sharing offers to provide small portions of the economy and P2PO in the world, required financing amount. combining with the reality in Vietnam to The intermediating online P2P build a specific research structure and lending platforms generate their revenue questionnaire survey. The questionnaire via service fees, which they collect from which was modified after testing surveys borrowers as well as lenders (Klafft, will be used in the official survey. The 2008). Many collect a closing fee of a results will eliminate invalid answers, and certain percentage of the funded loan in total we had 147 valid responses for from the borrowers, as well as fees for the next analysis. late or failed payments. Lenders often The questionnaire is designed for have to pay a servicing fee based on the the following three directions: amount they have funded to borrowers. - Firstly, the situation of P2PO lending he platform then services the loan, has 9 questions that are designed to collecting and distributing interest and collect personal background informa- redemption payments until the loan tion and historical data from matures. Normally P2P-loans are struc- borrowing and lending. tured as monthly annuity loans. If the - Secondly, the prospect of the new borrower defaults, the platform is obliged P2PO model and the development to arrange the collection of payments on dynamics of this model as well as behalf of crowd lenders although the barriers, this section contain 11 platform itself is not liable for losses, questions. which are borne by lenders/investors. - Finally, with 5 questions designed to Some platforms arrange a sale of non- examine the reaction of Vietnamese

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regulators to this model, could be system in order to make the borrowing used to support or restrict this new process become more convenient and model in Vietnam. more secure. This can be explained by the advantages of this model over that of The final data will serve as des- traditional banks. In practice, banking criptive statistics to answer the research regulations and procedures are relatively questions. The method in our opinion is complex, and consumer finance reasonable because this study is one of companies use simpler procedures with the first scientific research on P2PO very high interest rates ranging from 40% lending in Vietnam in general and Da to 60% And the operation of these Nang in particular. Therefore, the results companies also put a lot of questions of this study will greatly contribute to the about management. Therefore, 90% of foundation of further qualitative and respondents claim to participate in the quantitative research in the future. P2PO lending system demonstrates a legitimate expectation of consumers RESULTS AND DISCUSSION about a more appropriate financial option for them. The demand having a system Current Situation in Viet Nam that helps people who need a loan can Data analysis results indicated that directly connect people who have unused nearly 90% of respondents have been funds and want to earn higher interest involved in lending or borrowing directly rates than traditional banks is actually a without financial intermediaries such as reality in Vietnam. banks. We observed a remarkable point that more than 70% have never loaned Motivations any unacquainted person. It is also This research also explores the interesting to note that, according to the motivations for interviewees to parti- analysis above, the important feature of cipate in the P2PO lending system. We online P2P lending is the openness of the found that two factors, in which "Know data disclosure of participants in the the information of lenders, borrowers as system and the assessments, the comment well as transaction history, evaluation (eg of the borrower or the lender. So we can in Uber, Grab is 4 stars, 5 stars)" has provide credit to people who have never more than 62.6 % selected, and "when known based on the assessment. So we lending in the platform of new system, see that the opportunities for P2PO are interest rates will be higher than bank huge with market gaps that traditional deposits" with 51% of respondents financial institutions do not yet meet. choosing. This result is also consistent When participating in the P2PO with many studies in the world, for system, profits from lending activities example, the loan generation process is will be taxed according to the law and transparent and creates a feeling of according to the group of authors, this can fairness and loans on peer-to-peer lending be an obstacle to this activity. However, platforms are said to generate higher re- as a result of the statistics obtained, more turns for investors (compared to tra- than 70% of respondents are willing to ditional bank savings) and to be cheaper pay taxes to be safer in direct borrowing for borrowers (Klafft 2008) and lending. Barriers Willingness to participate Among the barriers to be investi- In particular, nearly 90% of respon- gated, two factors were specially paid dents choose to participate in the P2PO attention by the investigators: "There is

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no insurance against the lender" and "Not emergence of a new paradigm - the yet aware of the law". These two factors sharing economy in general and P2PO are in line with the authors' prediction as lending in particular, competition has these are the two most differentiating increased dramatically in the sectors factors from traditional bank deposits. which has the presence of this new First, with the bank, when opening an model. account and depositing savings, If traditional banks could have a according to the law, depositors are respect for this new model and combined insured deposits up to 50 million. with the P2PO lending companies, However, when lent to an online peer-to- leveraging the strengths of both, at that peer loan system, the loan amount is not, time, the rights of customers would get or, more accurately, uninsured. Thus, the more care and then served more fully. risk to lenders is higher if the borrower This new paradigm with advantages of deliberately or unwillingly does not pay technology and innovation, once combine the loan. with the old paradigm - with the strength of credibility, government assurance and Provisions of Laws a new paradigm will bring benefits for Indeed, provisions of the law with both in the spirit of win-win. This regard to sharing economy in general and argument is more relevant when, in the lending system online, a component of next question of the study, 47% of the sharing economy system, in parti- respondents believe that the traditional cular, has not kept pace with the rapid banking market experience can be applied development of this model economy. This to the P2PO lending market compared to fact is not only in Vietnam but also in 15% who do not agree. many countries in the world, including in developed countries. We can find many Competition cases the law applicable to the model of Returning to the topic of competi- new economy are not consistent even tion, from the survey results, the authors within a country, such as Uber and Grab found that the field will be "the main can operate in Hanoi and Ho Chi Minh battlefield" between traditional banking City, while in Da Nang, there have been and the new model is the field of cases where Uber and Grab drivers were consumer loans with 65.3% selected, and subjected to be fined by traffic inspec- unsecured loans with 51% of the tions with a fine of 2.5 million VND, respondents (differ with consumer loans close to one month of minimum in which this type of loan does not have Vietnamese income. collateral). This finding corresponds to several studies that have been conducted Opportunity or Risk? which confirmed that the consumer credit Another interesting point from this market is one of the largest, most research is that when asked whether important credit markets, with outstan- P2PO lending is an opportunity for ding credit of $3.5 trillion in 2015(Balyuk traditional banking, 51% of respondents 2016). agreed with the above, while only 11.6% On the other hand, with P2PO did not agree. In another view, 25.8% of lending, loan screening is primarily based respondents said that P2PO lending on algorithms, and the process can also be would be a threat to the old model, while flexibly adapted to suit the time. In the opposite is nearly double, 41.5%. addition, the authors agree on the From the above data, we can draw many "knowledge used to manage and assess implications. It is clear that since the risk" as one of the fundamental diffe-

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rences between the two models. In the the activity is licensed and activities are traditional model, bankers are generally not granted. And even if it is allowed by well-educated, so the knowledge that is the Government, the local government used to manage and assess risk can still bans. outperform the new paradigm when The reason which accounts for the lenders, who may not have a strong highest proportion, 50.7%, for that the financial background, play an important government would supports this model is role in deciding whether to lend or not to it will promotes competition, strengthens lend their own money. That is one of the the lending market and, in particular, things to keep in mind while doing consumer loans, thereby providing additi- further research. onal benefits to the participants. Second- The research team looked at what ly, 46.7%, said that the government factors motivated the P2PO platform to supported the model for growth, contri- develop, and it is interesting to note that buting to the mobilization of idle capital the survey results show that the first and in the population and increasing the second factors are: High demand for borrowing capacity of the people, thereby customer loans and ability to meet high stimulating production and business demand based on technology, at 64.5% development. These choices are consis- and 47.4%. High demand for consumer tent with the review because the lending loans motivates borrowers to seek market is being priced by intermediary cheaper financing, more favorable loan financial institutions. As well as conditions, and a P2P platform that meets willingness to participate in this model, this requirement. And to satisfy this need, 88.8%, is a motivation for government the connection between the borrower and support. the lender can only be based on the new The survey results also show that technology that can be realized as improving the legal system must be in top perceived by the P2PO platform. This priority, at 52.6%, which is appropriate, result is also consistent with the results of since this platform has been innovated the study of data on the prosper.com traditional lending model with interme- platform in the US market (Funk, diary financial institutions, so it is Bachmann et al. 2015), and the research necessary to regulate, protect and pro- results in the Chinese market are booming mote it (Bruton, Khavul et al. 2015). P2PO model (Feng and Qin 2016). Moreover, this model is in need of government development support, at Governance 42.6%, because of its novelty over The survey also showed that the traditional lending models such as direct number of people who believed that the versus indirect and technology-based government would support and would not interaction instead of through inter- support was similar, at 28.8% and 27.4%, mediary financial institution. In the respectively. While most, 44.1%, survey process of development, each economic participants did not identify the attitude of model must going through periods from the Government to the P2PO platform. young to maturity stage. And in the initial This reflects the Government's unclear stage, government support is needed behavior on the model and platform that (Balyuk 2016). reflects on the perceptions of the people. In contrast to the above, the This situation is also consistent with what percentage of respondents said that the has taken place in the real that has been government would not support, with the reflected in the problem space of the first reason, at 57.2%, which was the paper, as the same type of business, but group interest from the traditional Bank.

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This is a fact in general and Vietnam in - Secondly, P2PO is both an oppor- particular. It is not just financial circles tunity and a threat to the traditional that connect with the politics that make banking industry. However, opportu- up the plutocrat, as often happens, but nities remain more than threatening. also the drafter of financial legislation in Once the traditional model recogni- Vietnam, so protecting their own inte- zes the advantages of this new rests, traditional Bank, is sure. Therefore, paradigm and joins together to serve instead of researching new policy the neglected segments of the market, proposals to meet development needs, the benefits of both and the interests they are willing to rely on the fact that of consumers are guaranteed. there is no legal basis to delay the - Thirdly, the views of the respondents implementation of the legislation; on the support of regulatory autho- resulting in up to 48% respondents said rities show that there is almost a that the government did not support the similarity in the proportion of res- P2PO model, due to unconfirmed legal pondents who believe that the bases, as appropriate. government will support and vice The survey results show finally that versa, saying that regulators will the first tool the Government will take, at restrict the Sharing economy model 56.6% that is to restrict credit limit. This in general and P2PO lending in is in line with the economic reality, as particular. This reflects the reality in any model when applied requires small- Vietnam and is a useful basis for scale trials before mass deployment and further research. larger scale. And also in line with the nature of P2PO is the unsecured Administrative Implications microloans (Lin, Prabhala et al. 2013). This study may indicate a number The next tool of choice, at 47.7%, is that of recommendations for the leaders of the the Government will heavily tax the traditional banks as well as the macro- P2PO model. Tax instruments are always level management. a powerful and legitimate tool to regulate P2PO not only put pressure on the economic activities. Therefore, when the traditional banks, but regulators are also government has not wanted to develop under pressure to reform existing the P2PO model, this option is regulations in order to better manage the appropriate. This result is also consistent competition and ensure harmony of with research in the United States interests, and do not hold back the (Chaffee and Rapp 2012). development of models that benefit consumers. CONCLUSION AND SUGGESTION Traditional banks should not consider P2PO as a threat and use their Theoretical Contributions impacts to influence regulators in favor of This study has shown three new their industry. This will sometimes be points in research on particular peer counter-productive as consumers may lending and financing in general. favor stronger new models. Choose the - Firstly, in Vietnam in general and Da strengths of the new model and find a Nang in particular, the potential of direction to combine with the ultimate online peer lending is enormous goal of better serving customers would be because of the need and the support a solution. Because the positive aspects of of consumers when they have more peer-to-peer lending, in addition to choices besides banking and traditi- economic efficiency, are helping to onal financial service. connect better between the financial

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world and the real economy, avoiding Innovation Observatory,” September. manipulated credit in areas such as real estate, highly risky speculation. As a Feng, X. and J. Qin (2016). Online P2P result, the benefits of the economy as a Lending: Factors, Behaviors, and whole, the new and old models as well as Mechanisms. Encyclopedia of E- the interests of consumers would be Commerce Development, ensured. Implementation, and Management, IGI Global: 1693-1705. Limitations and Further Research Finley, K. (2013). "Trust in the sharing Directions economy: An exploratory study." The main drawback of this study is Centre for Cultural Policy Studies, that the sampling is based on the online University of Warwick. Online survey tool, and the sampling technique is verfügbar unter http://www2. warwick. convenient. Further studies may test ac. uk/fac/arts/th generalizability with other sampling eatre_s/cp/research/publications/madis methods as well as examine the surveyed s/ccps_a4_ma_gmc_kf_3. pdf, zuletzt subjects from a variety of sources. At the geprüft am 2: 2015. same time, new factors could be added to Funk, B., et al. (2015). "Online Peer-to- this new paradigm in research. Peer Lending â A Literature Review." The Journal of Internet Banking and REFERENCES Commerce 2011. Galloway, I. (2009). "Peer-to-peer Atz, U. and D. Bholat (2016). Peer-to- lending and community development peer lending and financial innovation finance." Community Investments in the United Kingdom-Ulrich Atz and 21(3): 19-23. David Bholat, Bank of England. Gansky, L. (2010). The mesh: Why the Balyuk, T. (2016). "Financial Innovation future of business is sharing, Penguin. and Borrowers: Evidence from Peer- to-Peer Lending." Garman, S. R., et al. (2008). "Person-to- Bruton, G., et al. (2015). "New financial person lending: The pursuit of (more) alternatives in seeding competitive credit markets." ICIS entrepreneurship: Microfinance, 2008 Proceedings: 160. crowdfunding, and peer‐to‐peer Herrero-Lopez, S. (2009). Social innovations." Entrepreneurship Theory interactions in P2P lending. and Practice 39(1): 9-26. Proceedings of the 3rd Workshop on Chaffee, E. C. and G. C. Rapp (2012). Social Network Mining and Analysis, "Regulating Online Peer-to-Peer ACM. Lending in the Aftermath of Dodd- Klafft, M. (2008). "Online peer-to-peer Frank: In search of an evolving lending: a lenders' perspective." regulatory regime for an evolving Lenz, R. (2016). "Peer-to-Peer Lending: industry." Wash. & Lee L. Rev. 69: Opportunities and Risks." European 485. Journal of Risk Regulation 7(4): 688- Demary, V. (2015). Competition in the 700. sharing economy, IW policy paper. Lin, M., et al. (2013). "Judging borrowers by the company they keep: friendship Dervojeda, K., et al. (2013). "The sharing networks and information asymmetry economy: accessibility based business in online peer-to-peer lending." models for peer-to-peer markets." Management Science 59(1): 17-35. European Commission Business

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