[Seungseop Song's Financial Light] How Is Ontu-eop Different from P2P?

Online Connection Between Borrowers and Investors is Key
On-to Business Operators Must Meet Various Stringent Conditions

[Asia Economy Reporter Song Seung-seop] Finance is difficult. It is tangled with confusing terms and complex backstories. Sometimes, you need to learn dozens of concepts just to understand a single word. Yet, finance is important. To understand the philosophy of fund management and consistently follow the flow of money, basic financial knowledge must be the foundation. Therefore, Asia Economy selects one financial term each week and explains it in very simple language. Even those who know nothing about finance can immediately understand these ‘light’ stories that turn on the ‘light’ of finance.

[Asia Economy Reporter Song Seung-seop] On the 10th, a new industry emerged in Korea’s financial sector. It is the ‘Online Investment-Linked Finance Business (Ontu-eop)’. P2P companies that have passed the financial authorities’ review will now operate as Ontu companies. What exactly is P2P, and what changes when a company becomes an Ontu business?

P2P stands for Peer to Peer. A peer refers to a person or group of equal status in terms of age or position. P2P is a technology where multiple people in an equal relationship exchange data on a single platform.

P2P finance is the concept of exchanging money instead of data. It connects borrowers who need money online with investors. Previously, people could only indirectly participate in fund intermediation by depositing money in banks or by setting up lending businesses to lend money. But with P2P finance, you can review borrowers who want loans, lend money directly, and earn profits.

Employees of 8 Percent welcoming the registration of OntoUp. Photo by 8 Percent

It may seem similar to lending businesses, but it is different. Lending companies raise funds directly to lend money and collect interest. However, P2P companies do not lend money directly. They only connect people who have the capacity to lend and invest with those who want loans. They earn fees through this ‘connection’ activity. Until now, P2P businesses have been subject to the Lending Business Act, but companies have emphasized that they are ‘different from lending businesses’.

Accordingly, on November 26, 2019, the Online Investment-Linked Finance Business Act was proposed to incorporate P2P finance into the regulatory framework, and it has been enforced since August 27 last year. According to the law, existing companies must officially register with the financial authorities by August 26. Companies that fail to register can no longer operate as P2P businesses and must either close or operate as lending companies. Last week, the first Ontu registered companies emerged among P2P companies: ‘8 Percent’, ‘Lendit’, and ‘PeopleFund’.

Ontu Companies Can Protect Investors and Enable Institutional Linked Investments

On the 11th, officials are taking a commemorative photo at the launch ceremony of the Online Investment-Linked Finance Association held at Fintech Lab in Yeouido, Seoul. From the left: Yongtae Kim, Director of the Financial Supervisory Service; Byung-hoon Lim, Auditor of the Online Investment-Linked Finance Association; Chaeyul Lim, Chairman of the Online Investment-Linked Finance Association; Hyojin Lee, CEO of 8Percent; Daeyoon Kim, CEO of PeopleFund Company; Seongjun Kim, CEO of Lendit. Photo by Online Investment-Linked Finance Association

What differences do Ontu registered companies have compared to existing P2P companies? First, they must meet stringent registration criteria. The Ontu Act requires them to be joint-stock companies under the Commercial Act and to maintain a certain level of capital depending on the balance of linked loans. Additionally, they must satisfy standards such as conflict of interest prevention, internal control systems, and financial consumer protection.

Investor protection is fundamentally possible under the Ontu Act. Ontu companies must separate investors’ funds and borrowers’ repayments from their own funds and deposit or entrust them to a legally designated, credible institution. Linked loan claims must also be entrusted to external institutions specified by law, and procedures for liquidation in case of business suspension must be established.

Even if a company goes bankrupt or enters rehabilitation procedures, linked loan claims are ‘insulated’. Previously, when P2P companies went bankrupt or financial accidents occurred, it was difficult to recover investments. However, companies registered as Ontu businesses legally specify investors’ priority repayment rights, making them significantly safer.

Institutional linked investments by financial companies or pension funds have also become possible. Article 35 of the Ontu Act clearly and specifically addresses linked investments by financial institutions. Not only individuals but also pension funds, banks, credit card companies, and savings banks can participate. This means institutional investors can participate in P2P investments through Ontu companies and lend money to individual customers.

The three companies that succeeded in Ontu registration plan to actively enter the mid-interest loan market. They will provide loans to small business owners and mortgage loans using data and advanced credit evaluation models.