CONSUMER LENDING
Simple. Move from corporate to consumer. So far, the consumer loans market has been largely untapped by the institutional market. However, with the introduction of new funds and data mining methodologies, this growing segment of the market can potentially offer high yields, low volatility, high transparency and low duration.
The market is not small. In the US alone, Smart Lenders Asset Management estimates there are around $3.3trn in outstanding consumer loans. Of that, around $925bn is revolving consumer credit. The rise of ‘marketplace lending’, whereby online technology platforms allow nonbank players, such as individuals or institutional investors, to fund the debt consumers borrow, means it now accounts for a roughly 2% market share of that revolving debt – around $20bn a year in newly issued loans.
In Europe, a report by the University of Cambridge’s Centre for Alternative Finance, in partnership with KPMG and the CME Group Foundation, found that the total European online alternative finance market grew by 92% to reach €5.4bn (£4.7bn) in 2015. Within that, peer-to-peer consumer lending was the largest market segment, accounting for €366m in 2015.
The UK is the dominant alternative market in Europe by some margin, increasing its overall market share of Europe to 81% in 2015 with €4.4bn. The French, German and Dutch markets reached €319m, €249m and €111m respectively.
Asia, however, rules the roost when it comes to market size. In 2015, the total online alternative finance volume for the Asia-Pacific region was just shy of €95bn, dwarfing the Americas (€33.6bn) and Europe (€5.4bn).
However, Asia is less appealing as an investment destination. The Chinese market, for example, has been fraught by scandal and fraud, including the $7.6bn peer-topeer lending platform Ezubao, which turned out to be a Ponzi scheme and more than 95% of the projects on the platform were fake.
“Asia is essentially represented by China,” says Fabien Jullia, partner at Smart Lenders Asset Management. “It is a very opaque market for the time being, and very risky.” He points to the clear and well-established regulatory system in the US, their preferred market, and the better balance between lenders’ and borrowers’ rights.
INSTITUTIONS EDGE IN
Although the market is still relatively small – at €5.4bn the continental European market is arguably going to be tough to invest in on an institutional scale – the opportunity set is growing rapidly. And the early birds are already piling in.
Cambridge University’s research showed the institutionalisation of the market picked up in mainland Europe in 2015 with institutional investors accounting for 26% of peer-to-peer consumer lending worth €96m. Even over the course of the year, the growth of institutional funding was clearly on the rise, going from 21% in Q1 to 30% in Q2.
WHAT’S THE APPEAL?
One of the key appeals of consumer loans is the return potential, which fund managers estimate is around 7%.
“The average annual net return on credit cards over the past two decades has been over 9%,” Smart Lenders’ Jullia says. “The interest rates are pretty high, which covers the risk and makes the returns attractive.”
Marketplace lenders have been able to dramatically cut the operating expenses of traditional lenders from 5%-7% to 2%-3% by cutting out branch infrastructure and reserve requirements, for example. As costs and regulation increased in the postcrisis era, a lot of banks withdrew from making small loans as they became less profitable. Marketplace lenders have been able to use their more efficient structures to provide rates that are better for borrowers and that offer better returns to investors by taking advantage of the spread between what traditional lenders make on their lending and the rates they pay out on cash.
