In this chapter, the research includes a comprehensive literature review on OLP for SME corporate. Besides literature review, a further study on OLP’s business model will also be discussed in this chapter.
2.1. Introduction of P2P lending
Peer-to-peer lending is a new financing method dated back to 2005, initiated by Zopa.com (Zopa, 2018). A typical P2P lending established on an online platform. Lenders can lend money to non-specific borrowers through online marketplace. In the P2P lending platform, lenders are investors who receive interests as returns from the deal.
In the past research, four characteristics of P2P lending had been mentioned. (Chen and Han, 2012)
(a) Transparency: Under information symmetry, any borrowers or lenders are able to join the marketplace.
(b) Low operating cost and low entry barrier: Thanks to low operating cost, P2P lending is attractive for borrowers who need small amount of money.
(c) Diversified risks: P2P lending diversified risks by sharing borrowers’ risks to a group of investors.
(d) Credit investigation and authorization by third party: P2P lending cooperates with third party organization, such as rating agency or government credit agency to support credit investigation. Therefore, references about borrowers are more accessible to the lenders.
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2.2. Introduction of SME
The definition of SME is different in different markets or countries. Since this study focused on research in Taiwan, the study defined SME based on Small and Medium Enterprise Administration Ministry of Economic Affairs’ definition1. The benchmark for SME has two principles (i) Paid-in Capital and (ii) Number of employees. However, the standard varies in terms of the nature of business and industry.
(a) The enterprise is a company in manufacturing, construction, mining or quarrying industry with either paid-in capital of TWD80 million or less, or less than 200 regular employees.
(b) The enterprise is a company in the industry other than any of those mentioned in the previous paragraph and either had its sales revenue of TWD100 million or less in the previous fiscal year, or less than 100 regular employees.
Based on the definition, the sales turnover is defined by the figures approved by the tax authorities in that fiscal year or the previous fiscal year. On the other hand, the number of employees is defined by the average monthly number of employees for whom is registered in labor insurance.
2.3. Introduction of Online Lending Platform for SME
Online lending platform is a fully automated funding marketplace to small and medium business, which shortens lending decision from weeks to minutes by using data generated through business activities, including financials, online sales order, shipping records and other online reference.
1 Standards for identifying small and medium-sized enterprise
https://www.moeasmea.gov.tw/ct.asp?xItem=8261&CtNode=530&mp=2 (Review: 1 February 2018)
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2.4. The Current Method of DBS Local Lending Program for SME
DBS Bank (Taiwan) has developed a lending program especially for enterprises in Taiwan to accommodate to the local regulation requirement and try to differentiate from severe competition in banking industries. There are 1.4 millions of SMEs in Taiwan, which was around 97.7% of registered companies in Taiwan and there are 78.2% of employees are working in SMEs. (經濟部中小企業處, 2017). Due to the large amount of SMEs in Taiwan, DBS Bank (Taiwan) has launched a lending program to customize lending program in Taiwan. The local lending program starts from 2012 and the program keeps being updated to adapt to the changing local market. The program includes three types of risk acceptance criteria.
(i) Financial criteria. With the change of the program, the importance of financial criteria has decreased. This is because the quality of financial statements of SMEs is not accurate enough and financial figures are biased by different industries and different accounting standards. It’s getting difficult for banks to rely on financial data to analyze a SME’ solvency. Besides the inferior data accuracy, financial data should not be totally relied on because of three major points, including (i) Time lag: Financial statements are outdated indicators; (ii) Model restriction: The inferior capital structure is a negative signal but not the only factor to make a credit decision. (iii) Disintegrate management: Managements have responsibility to prepare financial statements. Thus, the management’s integrity is very
important. (林妙宜, 2001)
(ii) Non-financial criteria. Non-financial data is a vital benchmark for program lending because small and medium size companies could be adversely impacted by external environment easily. Therefore, a promoter’s integrity in business activity, family relationship, litigation record and personal financial stance could
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be an important information on lending decision. However, as there is many judgmental information from non-financial reference, a comprehensive check list results in long and inefficiency lending decision. The non-financial information includes (i) JCIC (Joint Credit Information Center) record; (ii) litigation record;
(iii) search for recent news; (iv) land and property registration documents, etc.
(Lin, 2016)
2.5. Lending to SME in Taiwan
In 2016, there are 1.4 millions SMEs in Taiwan. Geographically speaking, northern Taiwan accounted for almost half of SMEs. The detailed distribution is tabulated as below.
Table 1 Number of SMEs by areas
Area Number of SMEs
(Unit:’000) Percentage of Total SMEs
Northern Taiwan 657 46.3%
In terms of number of SMEs, Northern Taiwan accounted for more than 40% of SMEs, indicating that the number of SMEs was associated with business activities in Taiwan.
Nevertheless, in terms of years of establishment, around 30% of SMEs’ were less than 5 years.
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Table 2 Years of Establishment of SME in 2016
Year(s) of Establishment Percentage Accumulated Percentage
<1 6.8% 6.8%
The short years of establishment also implied a higher default risk for SMEs. (Small and Medium Enterprise Administration, 2015; 經濟部中小企業處, 2017)
2.6. Market Size of SME lending
While large corporate only accounted for 2.3% of registered companies in Taiwan but 71.8% of bank loans were lent to large corporates, indicating the SMEs only consumed smaller portions of total bank debts. In FY2015, the size of commercial lending amounted to TWD11,503 billion.
In FY2016, First Commercial Bank is a leading player in SME lending, followed by Taiwan Cooperative Bank, Hua Nan Commercial Bank and Taiwan Business Bank. In FY2016, the top 10 banks shared 71.5% of SME’s loan outstanding and most of them were government-supported banks in Taiwan.
Main players: First Commercial Bank, Taiwan Cooperative Bank, and Taiwan Business Bank. Most of them are government-supported banks.
The size of the market: TWD 3,243 billion
Percentage of market size control by government-supported banks: 63.2% of market share
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2.7. Regulation of Banking and Credit in Taiwan
Banking is a highly regulated industry. This industry is both governed by international regulation and local regulation. Banks are generally subject to minimum capital requirement based on an international set of capital standards, known as Basel Accords2.
A bank is a financial institution that collect deposits from depositor and lend money to borrowers. Lending activities can be directly financed by bankers or indirectly financed through capital markets. Therefore, banks are highly regulated in Taiwan because its importance of financial stability.
Table 3 Regulation of Banking and Credit in Taiwan
All banking busines
Foreign Exchane Business Loan Interset Rate
Regulation of Banking and Credit in Taiwan Executive Yuan
Central Bank of Taiwan is another authority of regulation for banks in Taiwan because Taiwan is a highly regulated market especially for exchange rate of New Taiwan Dollar. Banks in Taiwan are required to follow Central Bank of Taiwan’s instruction toward foreign exchange business, such as trade loan, currency exchange or all foreign currency-related business. The purpose of such regulation is to maintain TWD’s exchange rate in a reasonable range to stabilize the economy.
2 https://en.wikipedia.org/wiki/Basel_Accords
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According to Civil Law, section 205, the maximum annualized loan rate is 20 percent.
That is to say, the maximum loan margin is capped at 20 percent and the maximum loss is a hundred percent.
2.8. Value Proposition Model
The Value Proposition Model (Osterwalder, Pigneur, Bernarda, & Smith, 2014) is a tool which helps you examine whether your product or service creates the value that your customers are looking for.
The value of a product or service can be categorized into two basic types: gain creator and pain reliever. Gain creators produce outcomes or benefits that the customer expects, such as functional utility, social gains, positive emotions, and cost savings. Pain relievers eliminate or reduce the unwanted happenings that customers experience before, during, or after they accomplish a task or that prevent them from doing so.
A successful value proposition would find the fit between what a company offers and what customers want. Therefore, it is very important to identify the target customers, what task they are trying to accomplish, their gains and the pains, and analyze whether your product or service will meet their needs.
2.9. Platform Revolution
As the book, Platform Revolution (Parker, Alstyne, & Choudary, 2016) suggests, the platform is a new business model that uses technology to connect people, organizations, and resources in an interactive ecosystem in which value can be created and exchanged. Platforms use data-based tools to create community feedback loops that traditional companies cannot
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realize. Platforms like Amazon, YouTube, and Airbnb use feedback loops to gather community comments about the quality of content (on Amazon and YouTube) or the reputation of service providers (on Airbnb), increasing the efficiency and reliability of subsequent market interactions. Feedback from other consumers makes it easy to find books, or videos, or rental properties that are likely to suit their needs.
They also mention network effects, which refers to the impact that the number of users of a platform has on the value created for each user. Positive network effects refer to the ability of a large, well-managed platform community to produce significant value for each user in the platform, which are the main source of value creation and competitive advantage in a platform business. In the case of Uber, two sides of the market are involved: riders attract drivers, and drivers attract riders. In the case of Airbnb, landlords attract tenants, and tenants attract landlords. The effects for network growth is so great that platform businesses will often spend money to stimulate participants to one side of the market. If one side is attracted to join the platform, the other side will follow.
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