Consumer lending has become one of the most dynamic segments in the private market, evolving rapidly in addition to technology progress and changes in consumer behavior. The market size is $ 27 trillion, and growing consumer lending will provide a variety of opportunities, from conventional mortgage securities to new products such as Pay Later (BNPL) loans. 。
As the sector evolves, we will bring our own tasks to investors and policy proprieters, from the new risk return profile navigates to the gap between regulations and transparency. Understanding this evolving landscape is the key to solving its potential completely.
In a recent Bloomberg interview, Akila Grewal, responsible for Apollo's global credit product, predicted a private credit index growth rate of $ 40 trillion. The most interesting story in the interview was to include a consumer loan in the mix. This is the most rapidly growing sub -set class in a private market and can complement the portfolio directly exposed to lending.
Certainly, practitioners in many industries foresaw the future of private market distribution, including direct loans as low -off -powerful exposure and consumer loans as a growth driver.
What is consumer lending?
Roughly speaking, consumer lending provides consumers' creditworthiness. Consumer loans, which are historically provided by banks and other traditional financial institutions, have made dramatic changes through securitization, technology progress, and evolving consumer behavior.
Consumer loans can be classified into two core groups.
- Mortgage loan supported by real estate: These loans are secured by residential properties and represent consumer trust.
- Consumer loans supported by non -properties: This group includes individual loans, car loans, student loans, and credit card debt. In recent years, this category includes innovative products such as BNPL services, hybrid products such as salaries, and loans supported by consumers who sell to grids using renewable energy. In addition, it is expanding to include exotic products.
Traditional assets and new opportunities
The constant innovation promotes the sector -functional growth of the sector and provided a variety of investment opportunities.
Until recently, consumer loans have been handled almost exclusively by banks that are lent directly to individuals -Consider the conventional mortgage or loan for purchasing consumer goods such as cars and appliances.
Financial institutions are also consistently dependent on credit scores to evaluate the customer's execution, and classify their customers into brackets defined based on credit history. The credit score was ubiquitous in the 1960s and was important in evaluating the ability to repay the customer loan. The subprime mortgage crisis was caused by the increase in default by relieving loans to individuals with subprime credit score.
Banks continue to provide mortgages, but consumer lending is evolving deeply. Securities have become possible to redistribute risks, combined with myopia regulations and policy choices, causing moral hazards, causing a global financial crisis.
Recently, the rise of online lending platforms has democratized credits, and consumers can secure loans at unprecedented speed and convenience. However, this new landscape caused a problem to control access to credit. For example, a BNPL loan is offered at the time of purchase, so that most consumers can quickly postpone payments. This is destructive and has room for discussion.
Unlike conventional loan products, BNPL loans are often characterized by ultra -short maturity and interest -free structures. It is attractive to consumers, but these characteristics have their own tasks to lenders and investors, especially in understanding the relevant risk return profiles.[1]
Established structure and emerging opportunities
Each type of consumer loan is equipped with a clear set of risk -clear driver, which is formed due to factors such as collateral, borrower population statistics, macroeconomic conditions, and other factors.
An important feature of many products derived from consumer loans, compared to direct loans, is that they are normal asset -collateral loans. Investors have been claimed for a securitized asset pool and can choose traditional different risk/returns.
Securities that use cash flow from credit cards, car loans, and student loans, as collateral has provided diversifying and stable returns to investors. Security assets are usually excessively secured and often include additional credit enhancements.
The default of this space was traditionally less than 2 %, except when consumer stress increased. It was unlikely that the most advanced Trancier would have experienced loss due to the existence of credit enhancements.
In contrast, securitization of new products such as BNPL loans, which is still in the early stages, has presented some issues to be considered. The unique attributes of these loans -Interest -in -interest, a short period of time, and the rapid evolving criteria -provide issues in structuring and risk evaluation.
From the perspective of risk exposure, the meaning of underwriting loans has not yet been evaluated without the conventional interest payment of the publisher's interests primarily from the seller fee. When the profile is returned, a limited history performance data achieves the predicted return and evaluates the risk of these products.
But the most important thing is that BNPL lenders do not check their credit score because there is no interest payment. As a result, most BNPL loans are extended to the borrowers of the subprime. This can potentially cause default risk, combined with the lack of transparency. The problem of transparency is that most of these companies are individual ownership, so borrower data cannot be used.
BNPL companies are not interested in pursuing borrower when loan is already collected, so if the loan is securitized and removed from the balance sheet, it is deleted.
Future Road: Innovation meets regulations
As consumer lending continues to evolve, the regulation framework must be adapted to deal with the complexity introduced by new products and platforms. Improvement of sophistication, which depends on the use of new types of collateral such as intellectual property and energy cracks, requires transparent risk evaluation, standardized reports, and robust consumer protection.
For investors, the expanding consumer lending universe provides both opportunities and issues. Established products, such as mortgage securities and credit card ABS, provide a better -known risk -written profile, but be more important to emerging products.
stay tuned: The future CFA Institute Research Foundation Book for consumer lending delves into spaces from the viewpoint of portfolio management.
[1] The loan platform, which exploded by the user base during the pandemic, has long rely on borrowing at an ultra -low price to raise money for loan writing. Their profits were between the seller fee (7 % stadium) and the interest rates obtained from the loan facilities. However, as the price began to rise, borrowing became more expensive, and securitization spread. This provides additional issues compared to the securitization of conventional credit cards and student loans.
