The rise of Financial Technology (Fintech) Peer-to-Peer (P2P) lending has transformed individuals’ interaction in financial service. This marketplace-lending industry helps to connect lenders and borrowers without the use of a conventional banking system. Unlike most traditional financial institutions, Fintech P2P lending offers benefits for both loan borrowers and investors, such as lower costs and frictions, practicability, efficiency, narrow information asymmetry, and wide-ranging access to financial services - especially for low-income countries or underserved communities. While the P2P business model has vast potential to generate customers or promote financial inclusion, consumer protection remains the legitimate concern for users in P2P lending. Regulators are still facing various issues in designing a comprehensive legal and regulatory framework for consumer protection that can adapt to the fast growth of this technology.
P2P lending trends emerged nearly a decade ago along with the evolution of Fintech platforms in mobile devices as an alternative financial service. It allows customers to access loan requests through digital applications. Despite its popularity and benefits, Fintech P2P is prone to encounter legal issues and data abuse due to insufficient regulations. For instance, consumers often experience various predatory lending practices due to the lack of authority control. Some violations of Fintech regulation related to consumer protections include illegal Fintech, exposure of data privacy, high-interest rates, and debt collecting issues such as intimidation or violence. Moreover, the challenges of transparency and cyberbullying also occur regularly during transactions.
Policymakers are still exploring compliance mechanisms for Fintech transactions from the perspective of increasing financial inclusion for underserved populations. P2P markets have been well-established in many leading countries like the US, the UK, Denmark, Sweden and Singapore where consumer data is favorably guaranteed. In some developing counties, however, regulators are still examining the most precise legal framework to accommodate the needs of the industry while attempting to resolve numerous cases. For example, in Indonesia, even though government authority under the Central Bank and the Financial Service Authority (OJK) is already well aware of the risks and has developed a regulatory framework, there are still many violations such as data abuse, cyberbullying, and intimidation that can negatively affect the borrower. Although the OJK has created an investigation team that has blocked over 800 illegal Fintech companies, over 3,000 cases have been reported to Legal Aid Institute (LBH) Jakarta for breach of consumer data privacy and other issues.
As the marketplace lending industry grows and evolves, the potential risk in consumer protection posed by P2P lending is also increasing. Regulators will need to determine whether the existing framework has appropriately regulated the industry or how the regulations must be changed based on national circumstances and the financial services considered.
Fintech will continue to accelerate and transform traditional financial institutions in the years to come. Consumer data protection must remain an essential objective if the industry wants to maintain the trust of consumers. Governments must also be able to carry out innovative solutions through adequate preparation in regulation and cross-agency coordination by national authorities. These include strengthening of institutional capacity, building up knowledge, improving communication with stakeholders, and expanding consumer education. The international community should also bring together policymakers in order to formulate a consistent policy around regulatory frameworks for consumer protection. Governments should be more proactive in monitoring and encouraging service providers to develop a risk management strategy that supports operations. If the regulatory issues are resolved, the government must continue to provide an incentive to accommodate market demands.
