Fintech credit: Business models and operations management

Nội dung text: Fintech credit: Business models and operations management

1. FINTECH CREDIT: BUSINESS MODELS AND OPERATIONS MANAGEMENT Dr. Ha Van Duong dhv05yahoo.com Postgraduate Training Institute Hong Bang International University, Ho Chi Minh city, Vietnam Abstract: Financial Technology Credit (abbreviated as Fintech Credit) has rapidly developed and contributed to expanding the scale of financial service provision in many countries. In Vietnam, in recent years, financial technology companies have participated in providing financial services, creating many business models and new products and services, including Fintech Credit. Through analysis and synthesis with the theoretical and practical approach to business model and operation management of Fintech Credit, the study shows the formation and development of Fintech Credit with specific solutions for the development of Fintech Credit market in Vietnam. Keywords: Business models, ecosystem, Fintech Credit. 1. Introduction The Fintech Credit business model has grown rapidly in the world over the years, created a new capital supply channel in the market and contributed to promoting financial inclusion development. In Vietnam, a number of Fintech companies have begun to deploy Fintech Credit models through the use of Internet- based connections, contributed to the capital supply in the credit market recently. However, this is a potential risk model for all parties involved, which can cause certain economic and social instabilities. In particular, in the context of the lack of fully-developed legal framework as well as mechanisms, policies and guidelines for Fintech Credit activities, it has not created good conditions and opportunities for Fintech companies to develop this model. This paper studies the theory and practice of business model and management of Fintech Credit in Vietnam to propose solutions to create favorable conditions and opportunities for Fintech companies to continue applying innovations, creation of technological achievements and ensuring the legal rights of the parties, contributes to ensuring safety in developing Credit Credit in Vietnam. 67
2. Up until now, there have been many concepts of Fintech Credit, according to CGFS and FSB (2017), Fintech Credit is a credit activity created by electronic platforms such as peer-to-peer lending and often related to connect borrowers directly with investors, although some platforms use equity on the balance sheet to lend. In another concept, Fintech Credit includes all credit activities created by suitable platforms for borrowers with lenders (Investors). Depending on the scope of operations, these platforms are peer-to-peer (P2P) lending, lending based on community-based mobilization (Debt-based crowdfunding) or market lending (Marketplace lending) and includes platforms that use equity on the balance sheet to lend. Basically, credit provided by technological platforms can also be considered as Fintech Credit (Stijn Claessens et al., 2018). In summary, Fintech Credit is the use of financial technology to connect people who are looking for capital and those who want to invest with a variety of business models including: Firstly, peer lending model (P2P lending) (Figure 1): Borrowers sign up for loans on a P2P lending company platform, provide credit information and post it on the platform after it is verified and approved by the platform. Lenders can choose to fund loans that are available on the market. Individual loan contracts are established between borrowers and lenders, contract payments and repayments are separated from the platform account (CGFS and FSB, 2017). Figure 1: P2P Lending model Lending platform Credit risk analysis Investment information Supply capital Borrower Lender Repayment Customer account Source: CGFS and FSB (2017) After the borrower submits a loan, the login information is verified by the P2P platform through the scoring model set up to assess the credit risk. If the borrower meets the criterias, the loan request is listed on the website to call for lenders or 68
3. investors to invest. The lender receives information about the loan; when the loan is processed, the loan contract will be established. In this model, P2P lending acts as a intermediary for credit ratings, connecting lenders and borrowers, and recovering loans. Loans will be completely separated from the balance sheet of P2P lending company and will be directed to a legally separate account of the borrower. P2P lending earns income and service fees for loans and does not face losses in the event of default (David W. Perkins, 2018). In other words, in this business model P2P lending does not bear any credit risk and only acts as a facilitator between the borrower and lender (Derayah financial, 2017). Secondly, notary model (Figure 2): The loan is created by a co-operative bank. The online platform only acts as a broker, connecting borrowers and lenders (CGFS and FSB, 2017). Figure 2: Notary model Lending platform Credit risk Investment analysis infromation Borrower Loan Provision of Lender origination funds Repay Assignment of ment claims Credit risk analysis Fronting bank Institutional investor Source: CGFS and FSB (2017) In this model, Fintech companies engaged in activities still act as intermediaries, connecting lenders and borrowers. Once the loan has been approved, the bank will use money from the lender's account to transfer to the borrower’s account. The bank will issue a loan certificate to the lender and a loan to the borrower. Indirect lenders connect investors who want to provide funds with loans. Lending investors are individuals, financial institutions or investment funds that choose loans with interest rates and risk profiles that they want to earn interest on loans. When investors commit to finance a loans, market lenders use fronting banks to initiate loans. Market lenders buy loans from banks and then sell loans to investors. 69
4. In general, market lenders earn income and service fees for loans and do not face losses in case of default (David W. Perkins, 2018). Thirdly, Guaranteed Return Model (Figure 3): The platform operator guarantees the loans interest for the lender through the results of the borrower's risk assessment. Borrowers who received invested capital and have to pay the platform operator guarantee fee. The lender, the investor will select the loan based on the use of the loan, revenue, financial situation, business efficiency of the borrower. The loan portfolio will be posted online for investors to update and select. In this model, the investor's profit will be guaranteed at such a rate as 12% of the loan value and be reimbursed in the case of non-paying borrowers (CGFS and FSB, 2017). Figure 3: Guaranteed Return Model Lending platform Credit risk Investment analysis Guarantee Promised information fee return Funds invested Borrower Lender Repayment Source: CGFS and FSB (2017) Fourthly, balance sheet model (Figure 4): The platform operator retains the loans in the balance sheet to be sold to institutional investors, or retail investors. In this case, the platform operator takes money from investors and provides it to the borrower, who pays interest to the platform operator. In case the platform operator fails, investors will have difficulty to get money back. Lenders following this model are more dependent on capital sources such as debt, equity and securitization (CGFS and FSB, 2017). Figure 4: Balance sheet model Institutional Retail Platfrom’s balance investor investor sheet Loan sales Funds Asignment Keep invested Credit risk analysis of claims the loan Borrower Funds provision Lending platform Repayment Source: CGFS and FSB (2017) 70
5. Fintech companies use this model to basically use their equity to finance loans or receive loans from other financial institutions. Fintech companies assess risks and fix interest rates for financial needs and then disburse loans from Fintech's own capital (balance sheet) for projects that match the criteria. risk (Alvin Cahyadi, 2018). Fifthly, invoice trading model: Supplying capital of Fintech companies is also implemented in the form of credit as factoring. Fintech companies provide innovative factoring solutions such as providing online factoring or offering automated factoring solutions, which helps customers be more efficient from the service. Fast delivery and cost savings. Businesses use bill financing or factoring services to manage cash flow, allowing them to sell receivables to third parties. Fintech invoice trading platforms provide more flexible services than traditional factoring operations, including automatic invoice processing; provides quick liquidity and financial security for customers (CGFS and FSB, 2017). Sixthly, institution-backed lending model: Fintech companies participating in this model cooperate with banks as their source of funding and partnership is divided into the following 2 models: (i) Loan model based on Pure Institution-Backed Model (Figure 5): Fintech companies directly disburse funds from organizations' funds to lend; therefore, lenders are basically organizations. In this model, Fintech companies play the role of attracting customers, evaluating and sending customer risk assessment results to financial institutions. Because loans are created using organizations' money, the risk is also taken up by financial institutions. In this model, Fintech creates revenue from the loan commission of the loan disbursed (Alvin Cahyadi, 2018). Figure 5: Pure Institution-Backed Model Repayment Assignment of loan application Loan Fintech application Financial after Borrower assessment company institution Financial institution lend money via a Fintech company Source: Alvin Cahyadi (2018) (ii) Hybrid Model (Figure 6): Fintech companies borrow money from financial institutions to make loans; therefore, Fintech companies must bear the cost of capital for each loan disbursed. In this model, Fintech companies are still lenders; However, 71
6. different from the model supported by pure organization is to bear the risk of lending and the revenue generated by fees and loan interest (Alvin Cahyadi, 2018). Figure 6: Hybrid Model Repayment from Fintech company Repayment from borrower Loan Fintech Financial application company Borrower institution Fintech company borrow Provide funds to money from financial borrower institution Source: Alvin Cahyadi (2018) The advantages of Fintech Credit are simple credit process through online interface. Many features of the platform benefit borrowers, lenders and investors in quickly checking online interest rates by providing some basic information about income, credit scores, and updates. The approval process for funding and after approval of the loan is quickly funded to the borrower (Derayah financial, 2017). At the same time, the unique characteristics of Fintech credit institutions are to use technology and digital technology to fully or largely interact with online customers and handle a large amount of customer information (Stijn Claessens and partner, 2018). However, P2P Lending model contains many risks: Firstly, most activities have very high credit rating standards and only provide high quality loans. But some loan cases are more risky, especially if lending to P2P Lending provides loans to borrowers who have been denied bank credit, so this is still the main problem leading to risk (Alistair Milne and Paul Parboteeah, 2016). Secondly, Fintech Credit faces the risk of platform failure; due to the need to develop systems for new customers, but the viability of the platform depends on achieving scale enough to cover fixed operating costs. Some platforms do not reach the scale and lending on the platform must cease operations, resulting in losses in loans (Alistair Milne and Paul Parboteeah, 2016). Lenders depend on the platform and the nominated person to charge the loan affected when the platform works not as expected (Eric C. Chaffee and Geoffrey C. Rapp, 2012), which will cause losses for lenders. 72
7. Thirdly, the ability to reduce the price of loans will affect investors because the investment is priced according to the market and some investments may be depreciated, causing losses for investors (Alistair Milne and Paul Parboteeah, 2016). Fourthly, there are fraud, cybercrime and inactivity (Alistair Milne and Paul Parboteeah, 2016), identity theft risks and money laundering concerns, privacy and security violations Data protection of consumers, (Eric C. Chaffee and Geoffrey C. Rapp, 2012). Fifthly, the information provided by the borrower is often unverified and when the information is verified, there might be inaccuracy, the lender has difficulty in determining the actual credibility of the borrower. (Eric C. Chaffee and Geoffrey C. Rapp, 2012), so it is difficult to monitor loans. Sixthly, the credit rating indicated by the platform may not accurately predict how the loans will operate because the platforms have a limited amount of historical loan data (Eric C. Chaffee and Geoffrey C. Rapp, 2012). Seventhly, individual lenders are completely based on repayment from individual borrowers and are not guaranteed by any collateral or guaranteed by any third party (Eric C. Chaffee and Geoffrey C Rapp, 2012). Eighthly, investments made by individual lenders are significantly lower than many other forms of investment because many loans have a term of three to five years (Eric C. Chaffee and Geoffrey C. Rapp, 2012). Due to the above risks, Fintech Credit activities are managed from the registration of license and during the operation of companies participating in Fitech Credit activities, including: Firstly, registration of operations (David W. Perkins, 2018) and according to ECB (2018), the general criteria assessed in the licensing process include, but are not limited to, the following four areas: (i) Governance (Compliance of management members and the appropriateness of shareholders); (ii) Internal organization (Risk management, compliance and audit framework); (iii) Operation program; (iv) Capital, liquidity and solvency Secondly, consumer protection and regulatory compliance (David W. Perkins, 2018) Thirdly, the management of the Government is required for operations (David W. Perkins, 2018). Accordingly, standardization of operations is the key to achieving system 73
8. safety goals, protecting customers, promoting competition and efficiency in the market. At the same time ensure proper monitoring without preventing financial innovation and use the platform to provide credit to borrowers who cannot afford to borrow from banks (Alistair Milne and Paul Parboteeah, 2016). 2. Method This paper analyzes, synthesizes theories and practical knowledge on business model and operation management of Fintech Credit in Vietnam. This paper collects and analyzes data from Fintech credit companies such as HuyDong, Tima, Lendbiz, Megalend, define and assesses the business model and operation management of Fintech Credit in Vietnam. Analysis and assessment results are the basis to contribute solutions to the development of Fintech credit in Vietnam. 3. Results In Vietnam, the activities of Fintech companies include four groups of activities and activities implemented including community capital mobilization, lending, personal financial management, payment (mobile), Bitcoin / Blockchain, POS (Point of Sale) management, data management and information comparison. In 2016, with 1 out of 39 Fintech companies, Loanvi is operating Fintech Credit. In 2017, with 48 Fintech companies, including 3 Fintech Credit companies are Loanvi (HuyDong), Tima, TrustCircle. By 2018, the entry of many companies such as Vaymuon, Mofin, Lendbiz, Fiin, Megalend, Mosa, MoneyBank, iDong, Avay, Evay, etc. has increased Fintech companies operating Fintech Credit in Vietnam (FinTech News , 2017) and (Fintech News, 2018). The number of Fintech companies operating in Credit Credit increased rapidly over the years, contributing to the capital supply along with the supply of capital and a large number of customers in the past years. Most Fintech Credit activities implement P2P Lending model under a mechanism with components including investors or lenders, platform and borrower. In particular, (i) borrowers apply for loans, login information to the platform. However, it is not clear if the the credit scoring model meet the minimum criteria for lending or investment decisions; (ii) Fintech company binds lenders to borrowers to decide on lending; (iii) loan decisions are quickly made and (iv) loans are transferred to borrowers via electronic platform. In addition, operating under the P2P Lending model is broken down in steps that are not really detailed in verifying the borrower's information, verifying the bank account and performing the payment process, auto-deducting. month. 4. Discussion and Conclusion Fintech companies engage borrower with lender and according to this business model, Fintech does not bear any credit risk, only acts as a facilitator between 74
9. borrower and lender and Loans are often not guaranteed. Fintech Credit's operations in some companies follow a fairly extensive P2P Lending model and are shown on the following aspects: Firstly, the scope of operation is wide, operating nationwide (Tima, 2019), MegaLend, 2019, ). Secondly, the loan size is quite large, the amount of money disbursed by some companies is quite high, the number of borrowers, lenders or investors is quite large (Tima, 2019), (MegaLend, 2019) , In There is a lending company with a total amount of more than VND 60 trillion with 2.9 people and a total of more than 31,000 people (Tima, 2019). Thirdly, lending products are quite diverse, including loans to meet the needs of production and business and life (Tima, 2019), HuyDong (2019), Fourthly, the loan term is mostly short-term loans (Tima, 2019), (HuyDong, 2019), Fifthly, the lending interest rate is usually higher than the lending interest rate of commercial banks, particularly the interest rate of loans of 1.5% / 1 month (Vaymuon, 2019). Sixthly, the amount of lending is small, the maximum loan amount of many products is VND 50 million and the fact that popular lending is popular is VND 10 million (Tima, 2019), (MegaLend, 2019) , Seventhly, the target customer orientation of companies is quite clear, some companies serve individual customers (Tima, 2019), (Vaymuon, 2019), some companies focus on joint customers small businesses (HuyDong, 2019), and some companies target small business and business customers (Lendbiz, 2019), With the rapid development, wide operation scale, the increasing operation scale of Fintech companies in recent years has created a capital supply channel to serve the needs of business production capital and improve life. However, the management requirements and the following aspects should be ensured: Firstly, the registration of the operation is not classified in the business field of Fintech Credit companies, the fields registered in the National Portal on business registration Some of these companies have not been fully integrated with Fintech Credit business model, which is implemented as "Other remaining business support services are not yet classified", "Supporting activities financial services have not been classified yet, " (Ministry of Planning and Investment, 2019). 75
10. Secondly, with the lending interest rate higher than the lending interest rate of commercial banks, affecting the efficiency of the borrowers' use of capital, besides, with the internal risks of Fintech Credit, there are no regulations and instructions to protect the benefits of investors and lenders in case of risks. Thirdly, the legal basis for Fintech Credit is incomplete, Fintech Credit business models have not been specified and specifically instructed to facilitate companies to diversify business models; Fintech Credit has not been standardized to ensure system safety goals, ensure proper monitoring, protect customers, and promote Fintech Credit to grow. Therefore, strengthening the management from the license registration phrase and during the operation phrase of companies participating in Fitech Credit to contribute to the safety and effectiveness of finance in Vietnam. It is necessary to have specific solutions. Suggestions contribute solutions to the development of Fintech credit in Vietnam, including: 4.1. Ensure common criteria are assessed during the licensing process Firstly, governance aspect: Ensuring the appropriateness of the knowledge capacity of members participating in management and financial capacity of shareholders and capital contributing members. (i) Relevance of management members: Management members must have sufficient knowledge, skills and experience to perform the management and administration functions of Fintech Credit; including full knowledge, skills and practical experience in banking and financial business. At the same time, ensure the knowledge, skills and technical experience to allow members to participate in management and operation according to technology-based business model. (ii) Relevance of shareholders and capital contributors: Ensuring shareholders and capital contributing members hold their shares and contributed capital in Fintech company for a long time to ensure stability. Fintech's finances, ensuring a healthy and prudent operation of Fintech for an initial period of time. Secondly, ensure the organization and internal management process: Ensuring a full organizational structure to manage and administer the entire operation of the company in the field of Fintech Credit. In particular, interested in the governance structure and decision-making process, including: 76
11. (i) Review the internal process of assessing loans, which will establish minimum criteria for information to analyze, evaluate and verify customer information and income. Evaluating this information will serve as a basis for credit ratings and the accuracy and completeness of the information is very important to Fintech's decision. (ii) Assess the feasibility of the credit scoring model, which may include a range of methods, from developing an internal credit scoring model to using data to verify credit scores obtained from a third party. (iii) Review and evaluate risks related to information technology, assess protection measures to minimize the impact of risks, especially with adequate human resources and risk management framework internal to manage, detect and respond quickly to network incidents. (iv) Supervise security and data management through review and evaluation of the comprehensive management of information technology risks with a specific focus on operational risk and assurance of technical requirements for information and data security. Thirdly, have appropriate activities, ensuring continuous operation in the time of operation, ensuring consumer rights, not causing disruption to the financial system. The operational program should accurately describe the earnings forecasted in the first three years of operation and include financial forecasts for the breakeven point period. Consider the costs needed to operate the business for a period of three years and measures to take action when the business is in trouble so as not to cause damage to the parties involved in Fintech Credit. Fourthly, ensure capital, liquidity and solvency, ensuring sufficient capital in accordance with regulations and in accordance with the scope and scale of operations; ensure the requirement of liquidity ratios and solvency during operation. At the same time, ensure the source of compensation and expected remedial measures in case of risks and financial losses. 4.2. Fully develop mechanisms and policies Fully develop, synchronize mechanisms and policies, facilitate Fintech Credit development, including: Firstly, in addition to specific regulations on business field in Fintech Credit to meet the requirements of business registration, it is necessary to fully regulate specialized activities; establishing product and service standards for Fintech companies that operate in a transparent manner, ensuring safety for Fintech Credit activities; in which, regulating standards and standards for trading of business 77
12. models, guiding companies involved in Fintech Credit to diversify business models. Implementing standardization at the sector level is very important for long-term growth and stability in Fintech Credit and the highest level of standardization can help reduce operational risks, strengthen security. Customer protection and benefits of participants are guaranteed. Secondly, create regulations to protect the rights of participants includes instructions on appropriate credit interest rates in each period, investors need to meet the criteria to participate, ensuring sufficient understanding to invest in unregistered companies. For borrowers, it is necessary to be informed about costs and risks related to the selection of loan products to decide on the selection and use of loans effectively and limit risks. Thirdly, create regulations in checking and supervising Fintech Credit activities fully and synchronously, regulations on credit rating of loan applications, risk management standards and standardization of data and transparency Transactions information to help identify losses, contribute to ensuring safety in Fintech Credit activities. Fourthly, in addition to ensuring proper supervision without preventing financial innovation and using a platform to provide credit to borrowers who cannot afford to borrow from banks, it is necessary to create a clear mechanism and Many advantages for parties involved in comprehensive monitoring of platforms and early warning of the implementation of models to improve safety for Fintech Credit. Sixthly, create policies to support the development and development of a business network suitable to each business capability group of Fintech Credit companies. Support connecting with experts and investors; support in training human resources and technical advisers, facilitating low operating costs, building a friendly and stable environment for parties to participate in Fintech Credit activities to grow. Seventh, create policies to support the dissemination of knowledge about Fintech Credit in order to equip investors with risk awareness and make the right decisions when participating in credit activities on the basis of Fintech Credit. Fintech Credit has contributed to expanding the scale of financial service provision in Vietnam in recent years. Through practical assessment of business model and operational management of Fintech Credit, it shows that there are limitations in Fintech Credit activities, failing to meet the requirements of managing Fintech Credit activities. The paper proposes solutions to ensure common criteria are assessed in the process of operating licensing; fully set up mechanisms and policies; establishing economic goals to guide the development of Fintech Credit; forming specialized centers and associations; have state investment support and business management. 78
13. Simultaneous implementation solutions will contribute to the safe and effective development of Fintech Credit in Vietnam in the future. 5. References 1. Alistair Milne and Paul Parboteeah (2016), The Business Models and Economics of Peer-to-Peer Lending, No. 17/May 2016, European Credit Research Institute, Brussels, Belgium. 2. Alvin Cahyadi (2018), Understanding the Lending Models of Indonesian Fintech Startups, Available from , [27-Feb-2019] 3. Bộ kế hoạch và đầu tư (2019), Cổng thông tin quốc gia về đăng ký doanh nghiệp, Available from , [27-Feb-2019] 4. Bộ kế hoạch và đầu tư (2019), Cổng thông tin quốc gia về đăng ký doanh nghiệp, Available from , [27-Feb-2019] 5. Committee on the Global Financial System-CGFS and the Financial Stability Board -FSB (2017), FinTech credit: Market structure, business models and financial stability implications, Report ISBN 978-92-9259-051-2 (online) 22 May 2017. 6. David W. Perkins (2018), Marketplace Lending: Fintech in Consumer and Small-Business Lending, Congressional Research Service R44614-Version 4, Washington, D.C., United States. 7. Derayah financial (2017), A Concept Study on Peer-to-Peer Lending, Available from , [27-Feb-2019] 8. Eric C. Chaffee and Geoffrey C. Rapp (2012), Regulating Online Peer-to-Peer Lending in the Aftermath of Dodd–Frank: In Search of an Evolving Regulatory Regime for an Evolving Industry, Washington and Lee Law Review, Volume 69, Issue 2. 9. European Central Bank-ECB (2018), Guide to assessments of fintech credit institution licence applications, March 2018, Germany 10. FinTech News (2017), Vietnam FinTech Startups, Available from , [26-Feb-2019] 79
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