UangTeman, a startup that lends you money, draws many negative responses. Firdaus Djaelani, Financial Service Authority’s Executive Head of Non-Bank Industry Supervisors, mercilessly (yet honestly) stated that UangTeman is a new form of userer that makes use of technology. Well, if you lend me a million with 1% of daily interest attached, I would prefer calling you a userer rather than a friend.
Such high interest is implemented by UangTeman since, sadly but true, its business model isn’t more modern than traditional bank’s, although utilizing technology within the operational process. Although users may practically apply for the loan online, first time users must still come to UangTeman’s office to complete the process. This forces UangTeman to establish a branch office in every city it operates.
This face-to-face process is UangTeman’s serious flaw. Every new branch office means more costs to spent. This is actually what startups need to avoid, by making everything online.
Another thing that adds more burden to UangTeman’s operational cost is the risk management fee. It’s naive to think that you will get all the money back once to lend it to someone. There must be some who fail to return the money. Therefore, UangTeman must keep its profit to cover those unreturned loans.
In UangTeman’s case, where the approval process is faster than in traditional banks, the team lack the time to deeply analyze coming customers. Hence, the risk will be doubled, or even tripled. They must also keep more money to cover failed loans.
This risk management cost can actually be minimized using a better loan approval algorithm, decreasing the risk of failed loans. However, there are two sides of a coin for this. On one hand, UangTeman is expected to gain as many users as possible. On the other hand, they need to pick those who are really worthy (and willing) to return the money.
As UangTeman gathers more and more customers, those aforemantioned costs can actually be reduced, as users who want to apply their second loan don’t need to come to the office. Moreover, based on the user database, UangTeman may pick those who are really competent and those who are not.
LendingClub, lending money without any risk
A money lender startup is not a new thing in other countries. There is a financial technology startup for every financial need, starting from personal loan to house mortgage, student loan, and business loan. One of them is LendingClub, which has been managing no less than $9 billion since it was founded back in 2007.
If UangTeman is Bhinneka-like, then LendingClub is similar to BukaLapak (marketplace). You may apply for a loan at LendingClub, while others with money may lend theirs to you, after picking you among a selection of applicants. LendingClub is the place where sellers and buyers meet and set the rate.
LendingClub will set the interest rate based on the risks that the loan may inflict. First time debitors with anonymous profile will be vested high rate, 25,13% in average per March 31, 2015. However, if the loan period lasts for a month or more, then the cost will be lower than that of Uangteman.
Meanwhile, recurring debitors or those with more credible profile will only be burdened with 7,15% of interest rate in average by the bank.
What LendingClub does is actually similar to what traditional banks do, which is to bridge money owners with those who need money. The difference is that bank does both (drawing and lending money) for its own profit, while LendingClub only takes 1% from each return.
This violates the rule a bit, since money owners only get 99% of the return. However, they may enjoy the interests added to the return. But that’s not the point.
How could LendingClub operate using that little percentage of money? My two points above basically answer that question; operational and risk management cost.
LendingClub’s operational cost is relatively low because all the processes are done online, with no face-to-face meeting required. What about the risk management cost? Isn’t anything done online has even greater risk?
This is LendingClub’s business key. It shifts the risk management fee to the customers. As described earlier, money owners may pick the applicants themselves. They may opt to get high rate of interests by picking some anonymous applicants, with greater risk of failure of course.
Money owners may also play safe by lending their money to people with proven background and loan history, although only receiving a small rate of interests.
It’s money owner’s call. If the borrower fails to return the money, then LendingClub has to cover nothing. The high risk high return concept applies here. This brings benefits to LendingClub.
The business scheme does not only profit LendingClub, as borrowers may also get the money, which might be unaccessible at conventional banks. Meanwhile, money owners can enjoy the interests. It’s a win-win solution.
Andi Miftachul is currently a Bank Supervisor at Financial Service Authority. He previously worked at DailySocial. This is his personal point of view and has nothing to do with the company’s point of view. He can be reached at @mchiell.