P2P Lending is Not Dead, with Mukesh Bubna

I feel a strange affinity with peer to peer lending. I've never done it myself as a lender, borrower or connector but one of the first projects I ever did in my MBA, some 16 years ago now, was on Zopa and the emergence of the P2P model. But more recently, the headlines have been bearish, with Zopa and Funding Circle - two pillars of the form - both shutting down their retail P2P arms.

As a lending model, P2P felt all but dead.

Except that, as the tide pulled back, one or two gems were still lying on the beach: like Monexo, the Chennai-based P2P whose founder and CEO, Mukesh Bubna, joined me for this chat. Mukesh and his team have turned P2P into an alternative inflation-beating investment option for investors, and an affordable path to credit-building for borrowers.

You can read more about Monexo at https://www.monexo.co/in/ (and watch some of those videos Mukesh mentioned while you’re there)

You can learn more about myself, Brendan le Grange, on my LinkedIn page (feel free to connect), my action-adventure novels are on Amazon, some versions even for free, and my work with ConfirmU and our gamified psychometric scores is at https://confirmu.com/ and on episode 24 of this very show https://www.howtolendmoneytostrangers.show/episodes/episode-24

If you have any feedback, questions, or if you would like to participate in the show, please feel free to reach out to me via the contact page on this site.

Regards,

Brendan

The full written transcript, with timestamps, is below:

Mukesh Bubna 0:00

I have a big faith on peer to peer lending. This industry can decentralise and disintermediate risk, because risk is spread over millions of investors and millions of borrowers. Peer to peer lending is an open kitchen where everything we do is public. So I think this model has had its ups and downs, but I think the root has been put and will grow, it will emerge as a winner in the long-term as I see it.

What it means, is that we are giving you affordable credit. There are people in Indian market - and we all know these small loans are not easily profitable unless you charge like Wonga, an APR of 120%, right? - but we have consciously taken that's not the right path. There's a usuary rate, in India credit card is still at 44%, we don't believe 44% should be the rate - that's what I see as a big opportunity.

Brendan Le Grange 1:02

I feel a strange affinity with peer to peer lending. I've never done it myself as a lender, borrower or connector but I can still trace its path in my career: one of the first projects I ever did in my MBA, some 16 years ago now was on Prosper and Zopa and the emergence of the P2P model. And then when I was in Asia, maybe 10 years later, call it 2015, it looked to be going mainstream there. I have this really vivid but completely isolated memory of sitting in a hotel by in Kuala Lumper talking to a guy who was in the final stages of regulatory approval to launch a P2P platform in Malaysia. But more recently, the headlines have been bearish, with two pillars of the niche on either side of the Atlantic - Zopa and Funding Circle - both shutting down their retail P2P arms.

It felt all but dead with all the decentralised excitement now being claimed by DeFi, blockchain, crypto, that sort of thing. But as that tide has pulled back, I've noticed one or two gems still lying on the beach. Welcome to How to Lend Money to Strangers, with Brendan Le Grange.

Mukesh Bubna, founder and CEO of Monexo, a Chennai based P2P lending platform, I'm delighted to be speaking to you this morning. And I think your tagline at Monexo is one of the best I've heard for the P2P model - lend grow, borrow grow - because it really is showcasing that mutual benefit that we can get if we get P2P, right. And we'll discuss how you're doing that in a minute, but first let's talk about your background.

You are now very much a disruptor in the in the financial services industry, but your background appears to be with some of the big names from around the world - so is this a case of 'you have to know the rules before you break the rules'? Or what was your thinking in the early parts of your career?

Mukesh Bubna 3:08

It's completely not by design that I joined the banking industry. And I'm gonna give out my age here, but in the early 70s we lived in a four storey building and the ground floor of that was a bank, a state government institution bank. And we used to actually walk into the bank every day and take a staircase to our house inside. And when I used to come back from school, I used to see these employees of these bank playing table tennis - or ping pong in different parts of the world - or playing carom board after around 15:30. And they will be playing that for next couple of hours before they go home, so that left an impression on me saying 'this is a good career to have'. That left a mark!

But I did my professional studies. And during my professional studies, I did a training with Citibank and I fell in love with consumer banking, I must tell you. There were no rule books. There were no garden paths. It was early 90s, so we were really doing path breaking stuff nobody had done in India, launching products which nobody had the market just based on our gut... and we failed many times.

But we came up with lots of learnings. And I kept falling in love, and before I realised was 22/ 23 years I had worked with that big organisation. When I was based out of India, I was asked to go work for six months in the US, six months in Mexico, six months in Europe - many times this happened and I moved on to Singapore and then moved on to Hong Kong

Brendan Le Grange 4:40

One of the things that was interesting for me was that when you left to start Monexo, you did that in Hong Kong were obviously it's a pretty expensive city to be living in. But what was the vision, or the inspiration, behind moving from a comfortable corporate globe trotting career to striking out on your own with Monexo?

Mukesh Bubna 5:01

So it's a long journey. It was not easy. One does get used to the fat paycheck and business class travel and living in the Shangri Las of this world in Asia.

My first interaction with P2P lending happened in 2006, actually when I was in a conference. It was a bankers' conference in which we're talking about the future of banking. We were 29 bankers from Asia and Europe and US, a very quiet meeting, and everybody was presenting their innovation. But there's one gentleman very quietly sitting next to me - and he was the real first founder of Zopa.

And he told me what he was doing. And I said, what is Zopa mean? Zone of possible alignment. Why? Because he had borrowers and investors coming in a coffee shop and discussing this. That's how he started that company first. And he was the first company in the world to start peer to peer lending. That left an impression.

I thought, 'that's a fantastic way of disrupting banks'. But behold, I forgot all about it. And then 2008 happened. Middle of the crisis, I started travelling again, back to the US, we had a lot of meetings to discuss the strategies of Asia, how should we do it, all that stuff... and I started seeing Lending Club on the airport. I was surprised - everybody was cutting down on lending but Lending Club was advertising in the biggest airports of the world, New York, etc.

Again, time came by I just manage my life at Citi, and I moved to Hong Kong and then started with China. I'm seeing this revolution happen in China. And there was one point of time where I said, Okay, I've done enough for banking.

Brendan Le Grange 6:41

And yeah, I mean, so I was working in Asia myself at a similar sort of time. And you're right, there was a lot of P2P excitement and interest coming through.

There are various peer to peer models trying to work around a timing issue, of how do you get a borrower and a lender together and get them talking - and agreeing - quick enough for modern expectations. But I was looking at your website and I see that 95% of your loans are approved within 24 hours. So this is no longer a case of either doing a direct peer to peer where you've got to sit and wait for a while, while everybody screens through your loan offer, this is happening just as fast as if you went to get a loan from a lender in the high street.

So, what is Monexo doing? And what does modern peer to peer lending look like?

Mukesh Bubna 7:30

Sure. First of all, we've done a slight pivot and "led grow, borrow grow" we've changed that very recently, so it's not on our website, but we moved to "delivering financial happiness".

What does that mean? From an investor point of view, in India, the fixed deposit interest rates have plummeted in the last two years from 9% to 5%, while the inflation rate runs close to 6% officially (unofficially it runs much higher). And then there's a 35% tax on the interest income. So you can imagine anybody keeping money in a bank on a fixed deposit is losing money in India. So our proposition to them is risk adjusted yield - we should be able to give you 2x of fixed deposits. And that's happens, right? Your money is growing. And that's a good thing to happen for you.

We tell our consumers to diversify across at least 100 borrowers. Now, that gives them a comfort of ability to absorb any shock from delayed payment or delinquencies.

Second is that we also have certain innovation, what we have launched also is a monthly income plan. So if somebody brought somewhere around 5 million Indian rupees on our platform, we are able to give them an income of 50,000 rupees a month, which goes back to their account for their own need, whether they want to shop they will travel, whatever they feel like. No, it is not 50,000 like a fixed deposit system. It's an arrangement giving you a ballpark on our app. Investors can start investing in less than two minutes, and can fun transfer 24 by 7, I don't have any human intervention required anymore for any investor, individual institution to on board themselves.

Brendan Le Grange 9:26

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Mukesh Bubna 9:38

Moving on to the borrowing side. In US, UK, Australia, if you went to a college student there's a 99% chances they have a driving licence and they are building a credit score - during college that means they have taken credit. In India, it will hold good for driving licence - not 99 but maybe 85 percent are thinking and working towards getting their driver's licence - but when you ask them, 'do you think about building a credit score during college?', they don't even know how to build it, why to build it.

So we've taken this as a pivotal moment. And we are focused on college students, we giving them small loans, and for three months, but they get entry into a credit score. India has four credit bureaus and we're reporting to all four, so they have a footprint on the credit bureau and the score starts to build out. Surely, the credit history is much more important than credit score. But that's a start.

Brendan Le Grange 10:35

That's an interesting take on it, because I have been speaking to a few fintechs in that credit building space. And it is something... for most people, there's still this dream of the mortgage down the line, and you don't want to get 20 years down the line and then find out you don't have a credit score and so you don't get the mortgage, or you get it but at an excessive rate.

Now, I'm from a credit scoring background. And well, what about the risk of the individual borrowers? You've already addressed this in some part, there's a investment mindset and so obviously, you use that in some ways that if I'm a lender, you're encouraging me to spread my risk across multiple borrowers. So that should something go wrong, I only lose a small portion of the money. But in terms of the individual borrowers, have you got any way to assess their risk, are you doing any modelling or gathering any data to help segment customers by risk?

Mukesh Bubna 11:28

We do that. We collect a lot of alternative data, SMS based data, and it's all based on permission from the customer. This gives us a lot of insight because SMS as recent as last two minutes back, we look at location data. In India, there is 65,000 colleges, we are creating each of these colleges, and based on those, we have eight grades of loans, but at a high level, conservative, moderate and high risk - conservative portfolios give you a 13% return, moderators will give you 15%, and a high risk will give you 17%.

And we also can find out from the SMS whether he's already over leveraged by taking credit anywhere else, even though you may not have a footprint because a lot of fintechs have come in India, but they're not reporting into credit bureaus. Our messaging is very strong around building a credit score, not about giving credit and then forgetting. So example, when the first email goes out, it's reiteration to them, saying, 'hey, you take this credit to build a credit score. What does that mean? You pay on time, right? Even two days delay does not help you build a good credit score.

What it means is we are giving you affordable credit - example being we all know these small loans are not easily profitable unless you charge like Wonga APR of 120%, right, but we have consciously taken that that's not the right path. There's a usuary rate. In India, credit card is still at 44%. We don't believe 44% should be the rate. I have worked in credit card industry from 90s. The rate hasn't come down. But the FDA rate in India in 1990s used to be 14/ 15%, that 14/ 15% has since dropped to 5% - the credit card rate remains at 44%.

Now people misinterpret interest rate. So we tell them one rupee per 1000 per day is what you will pay as interest. And in the app, we also give them the ability to track the credit score free of cost for the next 24 months - it's going down, it's going up, why is it going down? How we can help you improve that? We're also putting videos, crowdsourcing those videos, of financial education. Watch a one minute video. Now this Gen Zed does not have the patience to watch a 20 minute video, so you have to be very crisp, and then followed by a quiz. And if they play that quiz or the answer, they get scratchcards, so some gamification around learning financial concepts for themselves. And personal finance, like you need to know how to cook you need to know how to drive. That's a personal skill everybody should have.

Brendan Le Grange 13:59

It is such an important part of life in general, and often it's left until you've made the mistake and those black marks on your credit report can typically be there for five to seven years. So if you're a college student or a fresh graduate, you take your first credit card, 44% interest rates, yeah, you can easily get into trouble. Maybe you miss a payment, and certainly your credit score is penalised because of it. Whereas if you had this environment that said, look, he has affordable short term debt, and you're wrapping it in the education going beyond just connecting to people.

And yeah, love the new tagline as well. If we think more broadly about peer to peer, as we've said, around the world, several of the bigger ones have stepped back from peer to peer and either become full service banks or simply just stopped their products. But as they've done so, as they've stepped back, and this is now anecdotal, but I see yourself, I see some peer to peer lenders around in Europe, it seems like there's a new take on peer to peer - and I just wondered if you've got some thoughts on it as a concept, what aspects of it you think are working? Which ones maybe do you think, need to be tweaked?

Mukesh Bubna 15:11

I always saw the US as very different from the UK. The US evolved from peer to peer lending to marketplace lending, where JP Morgan Chase, Citi, all these banks went to Prosper and Lending Club and said, 'here's my money, help me get the yield'. That's why they did not go down the consumer path. But when one looked at Zopa and Zopa had almost 100% of their money coming from individuals.

It's the power of individuals, right? If you look at a consumer bank versus a corporate bank, the consumer bank always has access to liquidity. And corporate banks fluctuates, like heartbeat on somebody in ICU, right, but that is not happening in the consumer bank. I'll give you one anecdotal data: in India $1.5 billion, $1.5 billion, remember this number, 1.5 goes from saving account to mutual fund industry every month, as a systematic investment plan - 4 years back this was only $400 million. That's the pace of individual investing in the stock market. That's what I see as a big opportunity for Indians to diversify only a mutual fund to a peer to peer lending.

And household savings, we are saving around 30%. Now, saving is important. But when you have inflation rate of six, plus saving rate of 3.5%, interest rates in the bank will be negative. So you have to invest to grow your wealth. And that's where we come in.

Brendan Le Grange 16:48

Yeah, and I think it's clear that you talk about the mutual funds there. And obviously, a lot of that is echoed in the product structures that you've built at Monexo where you can do peer to peer, but I mean, again, think back and I'm always seeing this open model, the Prosper model, and this idea of 'okay, I've got to find the right just perfect borrower for me', but what you've been able to do then is create this opportunity, I can deposit that lump sum with you and I can get a managed return, I can split my investments over multiple borrowers. And it's not in that time consuming way it used to be, because I guess, that was a weakness of sorts in the original peer to peer model.

You've got an individual depositor, you've got an individual borrower, the bank joins them together and simplifies that process so they don't need to wait until they both have matching needs. And then peer to peer said, Well, thanks, taking a big enough slice that we can make this work, even if it's not quite so convenient. And now you're saying well, actually, we can make it just as convenient, yeah, 95% of loans within the day, and you've obviously grown a lot already, over 100,000 loans processed.

If you look at where you're going next, what is Monexo's vision of the future?

Mukesh Bubna 18:03

India, has some of the youngest demographics in the world. And I'm talking about 2020 to 2025, the GDP is supposed to double. So consumption will grow through the roof, but at the same time as a balancing factor here is the 30% saving rate. So I see tailwinds like fixed deposit interest rate dropping with the fact that people are looking for a yield. And mutual fund has done a fantastic job creating a market of investing in stock market, but what next? There's no other product available.

Yes, now people are talking about investing in US market. But it's funneling lots of money from individuals into few stocks. But the peer to peer lending money is taking a lot of money, a lot of individuals and funnelling it to lots of people, right. Today, we have a programme which we call social impact loan. It's a different word for extending microfinance loans during COVID time, we have empowered 15,000 women in rural areas of Tamil Nadu with loans of average 30,000 rupees an affordable rate, which they cannot even imagine. So saving in the city like Chennai, Mumbai, Delhi becomes capital going through us directly to a woman, and she benefiting from a low rate and becoming an entrepreneur, it changes lives for generations, right? Because if she's an entrepreneur, she can add more income, the kids will go to better schools.

And that's what we are very happy to do.

Brendan Le Grange 19:36

Yeah, it's really inspiring to hear and I think just used to be that if I couldn't measure your risk, if you were a brand new fresh graduate, I had nothing to go on. I would just solve the problem by charging more - I don't know which of you is truly risky and which is not, you all look the same to me, so you're all going to pay the 120% APR. And because credit is so important, the market would just pay that.

And what you're doing with this model is saying, actually, if I give you education around the loans, I'm going to reduce the real risk in there because I can help you manage it, understand it; I'm going to make it more transparent, so again, reduce the real risk, because you can understand what you're taking on; and I'm going to bring in some of this new data that's now available. Put that all together, you've given that route into the formal credit process. And over a few years, they've got a strong credit profile, they've got access to the full market offerings of the the fully competitive market.

I guess the last point on I need to check from the very risk side of my head is you've got this question of identity to solve. And you did mention working with that, but how do you know who is who and how do you manage identity?

Mukesh Bubna 20:49

The Indian FinTech revolution, the way it's moving, wouldn't have moved without a few government initiatives. One of them on identity is Aadhaar: it's a ID card which has been issued to everybody, which has a photograph, it has fingerprint, everything. 1.3 billion people have it, you can access that by paying a price to verify the identity. So we have what we call video KYC, know your customer, or E KYC. I don't need staff at the coalface to go out and collect those documents - thanks to the government. If that database didn't exist, it would be very difficult.

Beyond this, the government has UPI - the unified payment interface. This make money movement in few seconds, I tell you, this is not available in the world's biggest economies today. Seconds is the word, not even minutes, seconds.

And they have something called key match. So you can say I want to pay Monexo every month R1,060 on the sixth of the month. So be it. If, for whatever reason, that bumps, there's another button within our app, which allows you to pay from any wallet - Google Pay, Paytm, our system will send you an alert and you don't have to go and leave your house or your work. We'll just do it from that. So all this innovation, I cannot do it, it's the ecosystem which is coming along and helping me use that and improve my services.

Just the Central Bank of India, the Bank of India, can do a lot more to bring FinTech under regulation. Regulation is not bad. Being regulated, puts responsibility and financial services has responsibility. They have left a large portion of the industry unregulated. For example, as peer to peer lending company, I can take maximum 5 million rupees from an individual or a company. But there are unregulated entities who can take 10 times more. And they're not regulated. So regulators themselves have created a highway for wrong things to happen. And they are fixing some of that.

Brendan Le Grange 23:01

Yeah, you're right. With all of these ecosystems, it's so important, I think, to see the impact. It's always great to see that impact when it's really changing a life versus you're making it slightly more convenient for me to pay my debit card. You've got that wealth of tech skills of resources, as modernising that's happening in the tech world, contrasted with very poor populations. And we're able to see how well the good impact that modern technology can have.

And actually, I was talking to my boss the other day and saying I was going to be speaking to you. And he said, oh, Mukesh, he understands the lending ecosystem in India really well - you've obviously built up Monexo as a new way of thinking through the problems of financial services, but are there any other big trends happening in the broader Indian space that we should be keeping an eye on it?

Mukesh Bubna 23:48

Many, many things have been tried. In India, there are a lot of people who sell products on the streets, they sell something like flowers, vegetable, cooked food, etc. And for them, credit is like unaffordable - example: if I'm a flower vendor, I need to take money in the morning so I can keep a stock of, let's say, 1000 rupees, and during the day I sell, make my 1400 rupees. There are people who lend them that money for 200 rupees a day. Now, most of these people have started accepting QR code based payments. He can have a QR code and you can scan t pay him.

You can do mental maths, you and me cannot do it, they will do it, right, but they can't read and write. So now the innovation has happened that it will voice out that I had paid him 28 rupees so they can hear that and they're confirmed that when he is coming through and then the ecosystem coming out, which will allow you to lend to these people as little as 500 rupees. So it will be a revolving one day loan, but very affordable rate because it's to digitised, so simple, and you have a payment history record, a sales history record, but they will not have a bureau report. So based on that they do already and you can do loans of 500 rupees, which is give or take £10, £8, yeah.

Brendan Le Grange 25:15

And if you've got a really good day you sell out of your flowers by lunchtime, you go back to the market, the markets closed, so you can't do anything, you just have to go home. And so you maybe you could grow, but it would take you 40 years until you finally built up your business by which time you've probably gone through a disaster or two that took away your growth. So SME point of sale data that we might use for a midsize business we can now do down to a $10 loan, which is really exciting.

And some of its fairly dull back-end stuff, but to be able to move the money so cheap, so quickly, and the data so cheap, so quickly, to make that all work, it really is a different world, isn't it? And it's that grouping of the auto invest opportunities or the ability to do it without having to manage everyone individually but while still doing direct peer to peer sounds like you've thought through the pain points of the people involved.

So yeah, I wish you the best of luck with that. I'm going to certainly keep an eye on how you're growing in the future. So thank you very much for coming on.

Mukesh Bubna 26:15

Thank you. Thank you for having me on the show.

Brendan Le Grange 26:18

And thank you all for listening. If you enjoyed that, please do rate and review on your preferred podcast platform and share widely including on LinkedIn, and while you're there send me a connection request. The show is written and recorded by myself Brendan Le Grange in Brighton, England. Show music is by Iam_wake and you can find full written transcripts, show notes and more content at www.HowtoLendMoneytoStrangers.show

And I'll see you again next Thursday.