Consumer Lending - A market in recovery
MACCLESFIELD 9 November 2020
It's been over 6 months since the outbreak of the pandemic in the western world and the start of varying levels of impact across nearly all areas of our economy. While some sectors have prospered in the COVID-19 landscape, most have not been so lucky. Consumer lending and credit has not suffered the kind of challenges the hardest-hit industries such as hospitality and travel have, but the outcome has not been a positive one by any means. This article will update on what we, as a UK-based fintech, have witnessed over the first 6 months and shed light on whether the market is over the worst challenges and recovering, or is in reality facing greater problems in the months to come.
To give some context to my perspective, all of our businesses operate in the consumer credit space and are focused on improving access to credit. Our Monevo business provides market access and decisioning to over 150 lenders and banks globally, which gives us a unique insight into both lender and consumer trends in the four territories we operate in; namely the UK, US, Australia and Poland.
Continued restriction of supply
In April when the crisis hit the market, we saw a huge contraction in the supply of personal credit as lenders battened down the hatches and took stock of what was happening. This was not limited to a few lenders, nearly all lenders responded initially in the same way, and either stopped lending completely, or pulled back to extremely low levels of new lending. Lenders were rightly concerned and had many questions which needed answering about how COVID-19 was going to affect their businesses. How would the regulator react? How were their existing loan books going to perform? Were their current scorecards and decisioning models for new customers still relevant or did they need to start again from scratch?
To some extent, most of these questions remain unanswered today but progress has been made.
Over the last six months, lenders have worked extremely hard to overcome the challenges they have faced. At its peak, the guidance on payment holidays from the regulator resulted in two million people differing payments on credit cards and personal loans and today there are still over 97,000 agreements in place on credit cards, with a further 64,000 on personal loans. This not only resulted in a huge amount of work for lenders but also affected their cash flows and receipts from their lending books. This in turn has also contributed to the tightening of supply of credit.
April 2020 was the low point and since then we have seen lenders start to return to the market gradually with a month-on-month improvement in the supply of credit as lenders started lending again. The non-bank lenders have been quicker to return than the banks, perhaps due to the fact their income source is wholly reliant on personal lending to support their various debt obligations and overheads. The approach by the bigger banks who are in the position to 'take it or leave it' has been different. While banks have been furiously distributing CBILS and other business loans in collaboration with the government, their appetite to issue new personal loans and credit cards has remained very subdued. The appetite for taking on new customers and plotting a course back to pre-pandemic levels currently seems far stronger among non-bank and online lenders.
At the time of writing, around 95% of lenders are back in market, lending in some capacity and based on feedback from our monthly lender survey, the general sentiment among lenders is one of cautious optimism. Most will be pleased with the recent announcement that the government is extending the furlough scheme as this coming to an end was something that lenders were concerned about as it will no doubt result in job losses for some of their customers. Lenders will now have to wait until next year to understand how the end of furlough may affect their customers. Lenders are also keen to understand how customers that are coming off payment holidays will perform on an ongoing basis. The answers to these two questions will no doubt impact how lenders approach the start of 2021.
While lenders are back in market lending and there has been month-on-month recovery we are still a long way off of pre COVID-19 levels. In September 2020, all of the lenders we surveyed were lending well below pre-pandemic levels with most lenders currently lending less than 50% of gross lending levels at the start of the year. That being said, things do at least for now seem to be heading in the right direction with around half of surveyed lenders expecting growth between now and the end of the year, with the other half expecting lending levels to remain flat. No lenders who completed our survey are expecting a reduction in lending between now and the end of the year.
Consumer demand is returning
While supply remains very contracted relative to pre-pandemic levels, demand for credit products returned at a quicker rate and rebounded to a greater extent. One of the key drivers of demand is consumer confidence which in turn drives spending, which in many cases is facilitated by credit of some kind. In April as uncertainty peaked, we saw a huge drop-off in demand, which when combined with the contraction of supply, created a perfect storm. This is unsurprising given how uncertain all of us were about how the pandemic may affect us. As we all learned to live in a COVID-19 world, and as a lockdown eased, spending has resumed and confidence has largely returned. PWC's recent consumer sentiment survey results suggest that consumer confidence has bounced back up to September 2019 levels, with people feeling generally positive about their finances with cash to spare due to government support and savings made on things like fewer holidays and reduced travel over the last 6 months. Only 8% of people that took part in their survey expect to lose some or all of their income in the next 12 months, with very few expecting to miss credit payments.
While on the face of it the demand side of the market seems to be in positive shape, there are still potential challenges ahead. With a new lockdown coming into force, consumer confidence is likely to wane and consumers will simply not be able to spend money on many of the things they would normally borrow for, which is likely to slow recovery between now and Christmas.
The other factor consumers face is an increase in the interest rates they will have to pay combined with less choice. We can see from data and surveys from across Monevo's ecosystem that customers are less satisfied with the rates they can now access. This may not seem immediately intuitive as interest rates have gone down, but unfortunately, these decreases are not being passed onto the consumer. Lenders are pricing more risk into their lending to allow for potentially higher defaults and other unknowns caused by the pandemic. These relatively higher rates, combined with customers receiving fewer offers and less choice is negatively affecting the take-up rate by customers of loans and it will take time for customer expectations to realign with the new normal.
Innovation and opportunity
Clearly, trading conditions for credit providers have been very challenging over the last 6 months. Despite this, I believe there has been a silver lining. The pandemic has given the fintech industry the opportunity to demonstrate its value as a credible and important part of the financial system. In the UK, fintechs such as Starling, Funding Circle and Iwoca, as well as US lenders such as Kabbage, have been instrumental in helping to distribute government loans at a critical time. Fintechs have been able to move very quickly and step up where other incumbents have been unable to do so. The pandemic has also pushed banks to accelerate their digital transformation strategies as they have had to learn how to deal with customers in a completely different way as staff work remotely and customers learn to do everything online from their homes. Banks in particular in the US are more open than ever to partnerships with fintechs as they realise the value they can bring to the table, especially when it comes to enabling them to build and offer deeper more personalised and relevant relationships with their customers.
In the personal credit market, we have seen lenders adjust quickly to find new ways of working and lend in these unprecedented times. The adoption of open banking, for example, has accelerated quickly as lenders have suddenly realised how important this data can be when looking to understand whether a prospective borrower has been affected by the pandemic.
Initiatives like this are unlikely to be a silver bullet but the momentum and focus they have now is greater than ever and will lead, in my view, to a more progressive and inclusive market in the future. This evolution may not have otherwise occurred or taken years longer if it weren't for COVID-19.
So are we in recovery?
I think the reality is that this is going to be a game of two halves and we are currently eating oranges in the changing room waiting to see what will transpire in the second half of our match with COVID-19. There is no doubt positive momentum in several areas, with around half of lenders we surveyed expecting lending levels to return to pre-pandemic levels in Q2 or Q3 2021.
There are also a lot of lenders who remain unsure when asked this question and I do not believe anyone can say with confidence what will happen over the coming months. I think we can be cautiously optimistic as we have had, on balance, a good first half given the worst case scenarios we envisaged in April. We’ve also seen an acceleration of innovation and raised the profile of fintech which will create longer-term benefits and opportunity. In the second half, we need to watch things closely and continue as a sector to meet any challenges as they arise. If we do this successfully, we should be able to hold our ground and build on recent progress into 2021 and beyond.
Monevo is a multi-award winning fintech focused on improving access to credit. As a credit platform and API, Monevo powers credit comparison and market places for some of the world’s best known financial services brands.
Monevo’s decisioning and integration layer empowers over 150 lenders and banks to efficiently distribute their products through our partner network. Monevo operates as a credit intermediary as well as making its platform available on a CAAS (Credit-As-A-Service) basis to Partners and Lenders.
Monevo's platform currently sees over 1 million customers a month looking for credit.
If you would like to understand more about how Monevo’s bespoke lending marketplace services could help your business, please contact us on firstname.lastname@example.org