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Growing interest in alternative financing amid COVID-19

With sales down and unemployment on the rise, individuals and businesses are turning to loans. Outside of banks, some companies have also stepped up to offer loans to their customers or merchants. Money Mind explores why these companies are willing to take on the risks.

SINGAPORE: Big ticket items such as cars and properties have traditionally been financed by loans from banks.

Increasingly, however, smaller items such as e-commerce purchases are being financed by non-bank lenders - sometimes by the e-commerce platforms themselves.

E-commerce platforms are just one of the many companies, outside of the banking realm, that now offer consumer loans.

These companies have continued to do so to their customers, despite the uncertainties from COVID-19.

ADDITIONAL SOURCE OF REVENUE

For the companies, this additional financing business is an extra source of revenue and profit, and can drive growth in their core business.

According to research analyst Tay Wee Kuang of Phillip Securities Research, a loans platform is typically complementary to a company's main core business.

“When you have a main core business and that is centred around building payments, then you have a financing arm that can help to service your clients and provide a a one-stop shop for your entire core business.”

One example of such integration is Toyota Financial Services, a wholly owned subsidiary of Toyota Motor, which recently set up an office in Singapore.

 Mr Vinod Cherumadathil, CEO of Toyota Financial Services in Singapore, said that 35 out of the 100 cars it sells globally are funded or leased through the financial services arm.

“But because of Singapore’s high car prices, we believe that this ratio could be even higher. Indeed, about 90 per cent of all customers are funding or leasing their cars in Singapore. And that’s a good starting point,” he said.

Toyota Financial Services also makes up about half the group's balance sheet, showing the importance of such companies within the overall automotive industry, said Mr Cherumadathil.

BORROW MONEY TO LEND MONEY

While some companies loan out money mainly from their profit pool, others do so with borrowed cash. This is especially so among tech start-ups across the globe.

“If you’re a tech company today, you can borrow money very easily. Everyone wants to lend to tech companies because they are the growth sector," said Mr Gary Dugan, CEO of The Global CIO Office.

"So a tech company could take that excess to the capital markets and turn it around, then lend it onto their customers, who probably find it much more difficult to raise money in the markets.”

Even before the outbreak of COVID-19, loans from these banking outsiders were gaining traction, especially among smaller businesses and individuals.

In the US, alternative lenders such as PayPal, Square and Amazon were becoming go-to options for small businesses looking for loans, with some of them reporting more than 30 per cent year-on-year growth in their loan portfolios.

This is despite generally higher rates, or around 18 per cent annualised, according to the experts.

Heng Teck Yong, founder of C Squared Partners, explained the value proposition.

“From the customer’s perspective, they look at it in terms of how difficult it is to get the financing. If it’s much harder - like going through a formal process, going through a bank - the chances of them trying to do that are less likely because you have to provide a lot of information: Your credit history, your profile and so on. Whereas for consumer finance, very often, the review process is quite painless," said Mr Heng.

"The other issue is the cost. As long as it’s an easy process, and the cost is acceptable to me, I really wouldn’t mind where it comes from,” he added.

And despite the uncertainties from the COVID-19 pandemic, these companies have not shied away from lending.

In China, e-commerce firm Alibaba offered 70 billion yuan (S$14 billion) in interest-free loans for street vendors, while JD.com launched a Spark economic plan to provide up to 100,000 yuan of interest-free credit per merchant.

Mr Dugan from The Global CIO Office said that the COVID-19 pandemic situation means that traditional banks might be less ready to take on what they perceive as risk.

”COVID-19 has created a lot of problems. I think many people sit in fear, so if you’re a risk officer inside a bank, you’re looking for trouble, you’re not looking for opportunity," said Mr Dugan.

"The industrial companies have said, 'well, I’ve got a customer here. We want to get business done, we are prepared to step in and support this customer'. Whereas the bank will say, 'I need to redirect my capital somewhere else and therefore I can no longer consistently offer this capital to and assist the customer'.

"So I think it’s just a different attitude towards risk. Industrial companies tend to take a longer-term view,” he added.

 Access to customers’ data has also helped manage credit risks. Many of the industrial companies might already have a business relationship with these potential financing clients, and hence might not need to do as much due diligence compared to a bank.

Going forward, experts expect consumer finance loans to continue growing, regardless of who the lenders are.

This, they said, could provide a much-needed boost to pandemic-hit economies.

Mr Heng from C Squared Partners said: “The general environment is aligned to bringing back consumer sentiment, and consumer finance is an enabler. COVID-19 has also pushed a lot of countries to look inward, to encourage domestic consumption. So all this is very aligned and as a result, consumer finance would definitely be a sector that will be growing and all governments would want to see this sector grow."

This trend also needs to be seen in the wider context of the reshaping of the financial landscape.

Mr Dugan from The Global CIO Office said: “The world is seeing a massive reshaping of traditional banking. I think that we are going to see a much greater diversity of people investing in this sector. Today it’s companies providing loans, but it could even be the peer-to-peer platforms, establishing themselves and growing in the future. So banking would change. And we may not be calling it 'bank' in the future, but broad financing.”

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