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.

UK Motor Insurance Premium & Profit Profile

Autonomous Research has projected the UK motor insurance premium and profit profile in the period 2015-2060. Our estimates indicate that premiums will see an annual 1.5% rise leading up to 2025 with the current 20% return on capital (ROC) shrinking to a more sustainable 10%. This is reflected by the sharper fall in profits in the period 2015-2025. In our view, 2025 will be the pivotal point for motor insurers as self-driving cars take hold and premiums fall by nearly two-thirds by 2060. Unsurprisingly, profits are also expected to fall in this period; however we do not assume a slash in profitability with ROC remaining roughly constant at 10%.

New Vehicle Sales Forecast From 2005 To 2025

Autonomous Research estimates that nearly two-thirds of new car sales will take place in emerging markets (EM) by 2025. Our forecast shows new vehicle sales in (1) Developed markets, (2) EM (China/India), and (3) EM (Other).  The rise of the car-sharing economy (among other factors) in developed markets has resulted in shrinking vehicle sales from 44 million in 2005 to a projected 39 million in 2025. Meanwhile, lower purchase prices and falling operating costs are pushing vehicle sales in emerging markets, from a combined 22 million in 2005 to a projected 68 million in 2025. This growth will be particularly visible in China and India where the rise in sales is estimated from 7 million in 2005 to 41 million in 2025.

Changes in Road Accidents in Developed Markets

Autonomous Research has analysed the trend in driving fatalities and injury crashes in developed markets over a 25 year period. Our research suggests that fatalities decreased -19% in 1990-2000 and a further -38% in 2000-2012. This can be attributed to increased government action and technological advances in the developed world aimed at preventing deaths in car accidents. On the other hand, injury crashes increased by 5% in 1990-2000 and sharply decreased in 2000-2012 at a rate of -24%. The fall in crashes is associated with a shift in technological advances, starting in 2000, targeted at limiting the number of crashes as opposed to fatalities. This was accompanied by a modest increase of 8% in miles driven during this period due to a fall in average mileage per car. As a result, roads continue to become safer (on average) in the developed world.