Digital Lending

Addressable Market Analysis for Consumer and Small Business Loans

Autonomous Research estimates the opportunity for digital lenders in the US alone to be at US$1 trillion, excluding mortgages. At present there are $4 trillion in outstanding consumer loans in the US, although not all of this is available to digital lenders and we estimate instead that there is addressable consumer opportunity of $500 billion. This amount consists of $200-$300 billion for student loans, which have been mispriced by the federal government, allowing borrowers to potentially qualify for a lower rate. Auto loans will contribute $100 billion in prime and near-prime from non-banks. There is an additional $150 billion in personal finance in non-subprime credit card balances over $10,000, where the borrower has cash flow to move to a three or five year amortizing loan.

Small businesses are a further opportunity for digital lenders, with $310 billion in sub-$1 million loans to small businesses and an additional $100 billion in demand.  This unmet demand is sourced from estimates by the US Federal Reserve Bank of NY, who claim there is an unmet credit demand resulting from banks unwillingness to make smaller loans.  

Digital Lending Credit Risk and Yield Estimation

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Autonomous Research has estimated the difference between high and low credit card interest rates against that of digital lenders. The resulting industry interest rates are as follows: (1) 28.8% for average credit cards with a penalty rate, (2) 18% for the average credit card rate and (3) 12.6% for average digital lender rates. From these figures it can noted that banks have mispriced consumer credit risk by implementing a significantly higher interest rate compared to their digital counterparts. Consequently, it is apparent that the level of divergence between the highest and lowest quality borrowers is too narrow to differentiate between the best and worst credits, indicating that digital lenders can better match a loan rate.

The right-hand side graph details the yields gained from digital lenders in comparison to that of traditional bonds. Digital lenders yields have overtaken that of bonds, with 3-year loans from digital lending firm, Lending Club, averaging at 11% in comparison to Bloomberg US high yield rates of 9%. Additionally, Lending Clubs median returns are at 7% dwarfing Bloomberg’s investment grade corporate bond rates, which are at 4%. However, these rates are heavily dependent on today’s economic environment and rates may change when credit losses or interest rates rise.

UK and Europe Opportunities for Consumer Credit and Small Business Loans

Autonomous Research estimates the opportunity for digital lenders in Europe to be US$1 trillion at present. The UK addressable market is $260 billion, consisting of $93 billion in credit cards and $169 billion in consumer credit, although this figure ignores the $109 billion student loans market as current 1.5% interest rates on loans appear too low to entice digital lenders. Continental Europe is estimated to be a $500 billion addressable market. Despite this the European digital lending market is in a very early stage of development, issuing just $1 billion in loans in 2015, and consequently Auto loans are outside of the addressable market today. 

Small business loans are estimated to be a $51 billion market in the UK and $170 billion in Europe, with platforms such as UK-based FundingCircle being successful across four European countries. Additionally, many of the smaller SMEs in the US may not have access to bank finance and the overall market opportunity could therefore be greater.