[Financial Essay] P2P Companies That Spend As Much As They Earn: Are They Safe?

[Asia Economy Reporter Kim Min-young] Peer-to-peer (P2P) financial companies that emerged in 2015 are struggling with losses, prompting a warning for investors to exercise caution.

P2P finance is a business model where numerous unspecified investors lend money to borrowers through an online platform and receive a certain interest. After the P2P company reviews the borrower's loan application considering credit ratings, it discloses the product, allowing investors to purchase the principal and interest receivables of the product.

According to the Financial Supervisory Service's electronic disclosure system on the 26th, Terafunding (Terafintech), the industry leader with cumulative loans exceeding 1 trillion won, posted a net loss of 3.43586 billion won last year. The company recorded a net loss of 2.02145 billion won in 2018, marking two consecutive years of losses with an increasing deficit.

Companies that introduced P2P finance to Korea in its early days in 2015 are also recording losses. Lendit (Lendit Social Loan), specializing in personal credit loans, posted a net loss of 2.76207 billion won last year, marking four consecutive years of losses since 2016. Another major P2P company, 8 Percent, recorded a net loss of 449.47 million won, marking three consecutive years of losses. This company made about 300 million won in profit in its first year of establishment in 2016 but has been operating at a loss while expanding its business.

The main source of revenue for these P2P companies is undoubtedly commission income. P2P companies are known to charge about 3% commission from both investors and borrowers. However, to provide investors with an annual return close to 10%, most of the interest received from borrowers is passed directly to investors, leading to criticism that the business model is not very profitable for P2P companies.

However, due to the nature of startups introducing unfamiliar businesses domestically, losses are somewhat inevitable. Additionally, the market has rapidly expanded in recent years, increasing the number of competitors, which has led to cutthroat competition through advertising expenses and various events such as commission reductions, further worsening profitability. An industry insider said, “Along with easy payment and easy remittance, P2P has emerged as a core of fintech, causing many to jump into the market and intensifying competition.”

According to the Financial Services Commission, as of last month, there are 242 P2P companies with cumulative loans amounting to 9.6032 trillion won. The proliferation of companies has caused the delinquency rate to soar to 15.8%, raising concerns about investor losses.

The financial authorities have issued a P2P investment advisory. Recently, they warned, “Please clearly recognize that P2P products are high-risk, high-return products that do not guarantee principal, and invest under your own responsibility after understanding the investor precautions.”