Market Trends of United States Digital Lending Industry
Increasing Number of Potential Loan Purchasers with Digital Behavior
- According to the U.S. Small Business Administration, there are USD 410 billion in sub-USD 1 million loans to small firms and USD 4 trillion in outstanding consumer loans for small enterprises in the US. In addition, the US Federal Reserve Bank of NY calculates an approximate USD 100 billion unmet credit demand due to banks' resistance to making small-dollar loans. To address the unmet demand, technology-driven digital lenders are attracting attention in their capacity to collaborate with banks.
- Moreover, credit platforms majorly encourage investors to spread the risks. Investors can choose to spread the investments across various multiple loans and often can automatically gain exposure to a portfolio of loans based on the risk category and terms they select. Among P2P (peer-to-peer) consumer platforms, more than 95% of the United States use an auto-selection process. In facilitating credit, fintech platforms can provide monitoring and servicing functions that are similar to those of traditional credit providers such as banks.
- Most consumers use fintech providers to refinish or consolidate existing debts, but some use them to finance their major purchases (such as vehicles or real estate). Borrowing by students to fund higher education is prominent in the United States.
- On the business side, various small and micro enterprises typically seek funds for working capital or investment projects. Financing can also be in the form of invoice trading, whereby investors purchase discounted claims on a firm's invoices (receivables). SMEs are contributing to the economy significantly for most regions. The following statistics validate the above statement: According to the US Small Business Administration (SBA), more than 50% of Americans either own or work for a small business.
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Consumer Digital Lending is Expected to Grow Significantly
- Bank channel-based lending drew particular attention, especially with the IPO of consumer loan-focused GreenSky Inc. The company has secured more than USD 11 billion in bank commitments. Small business-focused lender OnDeck announced an expansion of its OnDeck-as-a-Service platform through which it licenses its technology to banks. The company added PNC Bank as a customer and launched a new subsidiary, ODX, to handle future bank channel-based business. Avant launched a bank partnership platform for personal lending called Amount.
- In order to keep growing, digital lenders are taking advantage of opportunities to expand the scope of their activities, both in terms of funding and product offerings. For example, SoFi, which began as a student loan refinancing company, now offers personal loans and mortgages. Personal loan-focused LendingClub also offers a business loan product. While some the companies, such as Square and PayPal, entered digital lending from adjacent fintech segments, some lenders are moving in the other direction by offering nonlending services. SoFi has been the most aggressive on this front, offering wealth management services and accepting applicants for its high-yield deposit account product, SoFi Money.
- Student-focused lenders remain the most diversified platforms in the digital lending sector as Student loan startups are witnessing new investments and new customers as the region faces a continued student loan debt crisis. The Federal Reserve estimates USD 1.7 trillion in U.S. student loan debt. Students, on average, graduate with USD 29,000 of private and federal loan debt and default on their loans at a rate of 15%.
- Product offerings in this segment include student loan refinance, direct student loans, personal loans, and even wealth management and mortgage products.
- Due to its capacity to assist financial institutions with service delivery, document management, information storage, and data processing online, the cloud can be regarded as one of the most important trends in digital lending. It's understandable why, according to Accenture, more than 90% of banks currently have at least a significant level of workloads operating in the cloud.
