HBS Students Launch Peer-To-Peer Lending Startup Even Before Graduation

Even before finishing the MBA course at Harvard Business School (HBS), Kelvin Teo, 29 and his classmate Reynold Wijaya, 27,  not only built a web-based peer-to-peer lending startup as part of the curriculum but also managed to get South East Asia’s biggest bank DBS Group Holdings Ltd., interested in the venture as a potential partner and even earned additional credits for the course.

At HBS, students are required to participate in an year-long course, ‘Field’, an acronym of Field Immersion Experiences for Leadership Development. The participants need to come up a business project aimed at an international partner. Thus was born the company named ‘Funding Societies’, as an independent project under faculty supervision.

Teo had sent the partnership proposal to DBS Group CEO Piyush Gupta in October 2015 and received a favourable reply. Even while the founders have some eight weeks to go before graduation, the company is already functional. They had managed to raise capital to the tune of $1.2 million from venture capitalists travelling to Singapore and Jakarta during school holidays and put in $400,000 by themselves.

The net result is that the startup, with a staff strength of 39 employees, has managed to arrange S$ 5.5 million ($4.1 million) in loans. It charges a three to four percent origination fee from borrowers and keeps one percent of repayments to investors.

At one level, the startup’s success is also a pointer to how the traditional banking sector wants a share of the fintech pie. In fact, a PwC global survey found that 95% of the bankers stated that fintech firms may eat into at least part of their earnings.

The PwC report is based on a survey of 544 CEOs, heads of innovation, chief information officers, and top management personnel in financial services companies from 46 countries. While traditional financial services companies believe fintech startups could grab 23% of their business, the fintech companies estimate that they could take as much as 33% of the business from the legacy financial system.

Teo from Senai, Malaysia had  graduated from National University of Singapore with a degree in accountancy. He worked at McKinsey in the city state and later as an analyst for New York-based buyout firm KKR & Co. while his mother is a retired schoolteacher, father is a former manager at a palm plantation company. Wijaya’s parents built Jakarta-based PT United Family Food into a multinational with more than 4,000 employees. An engineering graduate from the University of Michigan in Ann Arbor, he had worked at his family’s company.

They started the company after finding that fintech was booming in China, but was yet to make an impact in Southeast Asia. Basic financing for small-medium entrepreneurs was difficult to get in Indonesia and other countries of the region and they felt this gap could be filled by the startup.

A network of former Mckinsey & Co employees helped net their biggest investor, Alpha JWC Ventures of Indonesia. PT Bank Sinarmas became escrow agent for the firm.

About the business, they said the firm charges interest rates slightly higher than banks to minimize adverse selection. It is 9% to 14% simple interest and the full return is passed on to investors with only a one percent service fee. With diversification, investors could earn at least 7%, much better than deposit interest of 0.05% in Singapore.

Meanwhile, in the United Kingdom, fintech startups, numbering more than 12,000 in London alone, were stated to be eating into 20-60 percent of traditional banks profits by eroding their margins, according to a McKinsey report. Almost 75 percent of credit experts at a recent poll also agreed that peer-to-peer setups posed a threat to traditional banking.

Consumers are finding these lending platforms to be a good alternative to bank savings accounts that despite offering deposit protection have low rates as also equity based investment products that carry high risk factor. With their low costs and charges, these platforms pass on the benefits to customers. Rigorous credit risk management has resulted in keeping average default rates below three percent over the past ten years.

In the UK, these platforms have together lent more than GBP 3 billion. Small-medium entrepreneurs are also increasingly looking to this sector for loans and invoice finance to avail benefits of quick and efficient services, competitive interest rates an no penalty charges for early repayments.