To regulate fintech, P2P lending innovations on a strict or soft approach?

The pros and cons of giving flexibility for new fintech startups to start without regulation, otherwise we may not heard of Alipay or other mobile payment today as the former started without any license.

For the peer-to-peer (P2P) lending sector, the shakeout in China’s $192 billion industry is accelerating at a rapid clip recently. The government introduced a complex registration process in December to clean up the sector, with officials in Shanghai identifying 160 problem areas such as overly high interest rates, misuse of funds and exaggerated return figures.

"People that are running these P2P companies don’t actually understand what P2P really is", said a fund manager. The number of operating P2P platforms fell to 1,836 in June from 3,800 in 2015, based on statistics from Wangdaizhijia.

The number may shrink further to under 200 in three years because most existing lenders do not meet regulatory requirements, according to a report issued by the China International Capital Corporation on Friday.

On the flipside, those platforms that built with the right fundamental, problem solving solution and discipline are busy in scaling their businesses and leveraging more emerging technologies to provide better data analytics and enhanced customer needs and experiences. According to Dianrong (one of the largest P2P operator there), the P2P industry in China today is 9x bigger than US alone where the latter is the pioneer in this space.

Over to SEA region, Malaysia took the bold move to regulate the industry back to 2015, however the barriers of entry is very high with requirement of high amount of paid up capital, experienced and competent management team and only restricted for offering to SME loans thus creates low innovation flexibility or leeway.

For Singapore, despite taking the prudent approach to regulate the industry a year later, there are couple of platforms already took the first mover advantage to operate without licensing for couple of years and some granted one subsequently. The Asian Financial Hub's regulator is seen as forward thinking by not disallowing new fintech startups to operate without regulation approval as long that they don't break the rules and triggered people's complains or in essence to self-regulated. As a result, there are a couple of successful P2P companies born and good adoption rate recorded there.

For Indonesia and Thailand regulators, it was observed that they also following the suit to allow P2P platforms to start without their approval but as numerous Indon platforms are moving into like China's bad apples thus triggering their regulator to regulate them.

‎"We support P2P lending so the people can have an easier access (to financing). But when the access has been easier, the P2P companies feel the need to offer a high rate," Eko Ariantoro, the director of the financial inclusion development directorate at OJK.

There are 36 registered fintech firms operating in Indonesia and OJK said 42 others were in the process to be approved. The OJK plans to also issue a new regulation for crowdfunding platforms this year as part of efforts to protect customers' fund, Ariantoro said.

Real question is how can regulation facilitates innovation at start without stiffling it? There is also a softer regulatory framework called sandbox come up in most of the major cities around the globe however there is no common standard on the leeway and on the risk taking level where the startups is allowed to test their innovation in a safe environment which caused another innovation road block. What do you guys think?