Editor’s note: This is a guest post from Yo Shibata, a serial entrepreneur that has sold three businesses. In 2016, he co-founded Crowdport, a “Bloomberg for marketplace lending in Japan”. He is also a partner at an angel investment fund, Tokyo Founders Fund. His previous service Smapo, later acquired by Rakuten, provides users with loyalty points as they enter participating stores by pairing a mobile application with his proprietary ultrasonic based micro-location technology. Prior to founding startups, he worked for McKinsey & Company as a consultant.
Marketplace lending growth in Japan has been slow compared to the U.S., Europe and China but that has started to change in the past three years. The market has been almost doubling each year and we expect this trend to continue through 2017. Investment volume was $140 million in 2014, $310 million in 2015 and $530 million in 2016. We estimate it to reach $1 billion this year.
Marketplace lending, also commonly referred as “social lending” in Japan, started as p2p lending around 2008 but struggled due to high default rates, which sometimes reached 30%. Since Japanese lending law prohibits interest rates above 15% in most cases, a 30% default rate was not sustainable for those businesses.
Around 2011, marketplace lending players, which at the time was just three or four companies, started to shift their focus to business loans, specifically in real estate and clean energy where there is valuable collateral behind the loan. As those players started to prove the new model was working, new companies entered the market. The number of crowdfunding platforms increased from less than 10 to 21 in two years. There are now many more companies looking to enter the market.
The industry average APR increased to 8.4% from 5.7% in two years, mainly due to newer entrants that were charging higher APRs. Default rates in the past three years have been close to zero due to platforms being more selective on who they lend money to. As a result, marketplace lending as an asset class became very attractive to investors.
From a macroeconomic point of view, Japan is famous for zero or negative interest rates. Yields for Japan’s 10-year government bond are a mere 0.06% and the 5-year bond yield is -0.07%. Average APRs for savings accounts at banks is 0.4%. Average consumers are pessimistic on Japan’s economy in the long term, due to an aging and decreasing population which is a hard trend to reverse.
So why aren’t Japanese people rushing into marketplace lending where APRs are 200 times better than savings account? Are they conservative? No they are not.
When you look at the bitcoin prices and the hype around bitcoin in the past three months (March 2017 – May 2017), it’s mainly been driven by the Japanese. JPY-based bitcoin transaction volume often exceeds USD-based transaction volume, which may be surprising. It is well known that Japan has the biggest ForEx trading volume in the world. A portion of the Japanese population do like trading and we estimate there are about 100 million active ForEx investors in Japan.
However the rest of the population are conservative investors. Despite the effort by the government to convince the population to financially prepare for their retirement, financial literacy among the Japanese population has been low for many years.
Current investors in marketplace lending are early adopters but are also cautious. There has been almost no loss of principal for three years across all crowdfunding platforms, and an 8% APR is very high. We predict that some funds will have principal losses in the coming months and some investors will react emotionally to the loss of principal since this isn’t something they are used to.
Crowdfunding platforms can do better at managing expectations, customer support, information disclosure and publicity as the platforms mature. We believe our service, Crowdport can add value to maintain transparency in the market. [Read more…]