eOriginal’s Director of Fintech Strategies, John Jacobs, provides an industry overview for 2018
You may have seen the Asset-Backed Alert (ABA) predictions for 2018, which included several trends in the Asset-Backed Securities (ABS) industry. For example, ABA cautioned readers about possible slowing of growth due to sluggish segments such as sub-prime auto, yet also included optimistic predictions of $811B based on the economic environment:
“Across most asset classes, investor demand is high and funding costs are low. And the expectation is that already narrow spreads will continue to move inward for at least the next six months, with concerns about credit risk remaining muted amid modest economic growth and rising household incomes.”
Here are my additional observations about activities around asset-backed securities (ABS) for the digital lending segment and the opportunities for growth based on increased consumer confidence in online lenders; banks and institutions forming synergistic partnerships; and ABS investors all wanting a piece of the action.
Online lenders continue to leverage partnerships and, as a result, have experienced explosive growth in ABS in its segment. For example, the JP Morgan Chase partnership with On Deck Capital is maturing into a strong contender in small-dollar credit. When student loan fintech Earnest was acquired by Navient Corporation late last year, we saw what I believe to be a trend that will shore up ABS—Earnest retains its management team and brand equity with consumers, as Navient reaps the benefit.
These and other strategic partnerships provide a newfound confidence for investors. I think we will see more equity capital and venture capital money in this space as the year progresses. Digital lenders are taking market share from bank and traditional non-bank lenders, which is driving partnership with banks and spurring them to launch digital lending platforms of their own, following the model of Goldman Sachs starting Marcus.
Focus on the Customer Experience
Banks and other institutions are not partnering or acquiring online lenders as a knee jerk reaction—they are looking for technology that will provide the most seamless customer experience. The technology is there among the winners in the segment: In fact, word on the street says that there will be one or two semi-impactful acquisitions this year.
Another trend to watch for among bigger online lenders—who will follow the lead of industry giant Lending Club, will be the shift to sponsoring their own securitizations. This ability to control more of their destiny without having to partner will be increasingly attractive to the companies that have the traffic, infrastructure, and “juice” among consumers to support the move to in-house ABS.
New Business Models Burgeoning
Point-of-purchase lending for consumers will also grow. Companies like Affirm and Bread are a good example of how this model remains attractive to consumers. Similarly, home improvement loans from online lenders like Marcus and Marlette Funding will lead to more opportunities for the ABS markets.
What both ABS investors and banks look for in a partner is not just in the technology. The most attractive online lending partners have a process that reaches the public in a way that not only provides a loan, but also provides education about credit health and guides them as they work toward more financial stability. Successful entrants will educate these borrowers and gain better payment structures, with total transparency as the goal. They’re not only originating deals efficiently, but also minimizing loss among the consumers they serve. Additionally, the setbacks of 2016 for marketplace lending that impacted investor confidence are no longer creating a drag on growth.
Other Growth Drivers
Depending on which reports you read, ABS experienced 20-30 percent growth at the end of 2016. By the end of 2017, that number was close to 80 percent. If ABS in the online, non-prime side stays as strong as analysts predict, it will lead to very solid growth for the ABS market. However, as the ABA suggests, this growth may not approach last year’s numbers.
Online originations will continue to bounce back from where they were—keeping in mind that even though deal originations were down, digital lenders still managed about five times as many ABS transactions last year. With digital lending representing only 10 percent of a total available market of $1 trillion by 2020 there is a lot of money left on the table for 2018.
We will bring you more in-depth thoughts on these and other topics in future editions of eO Insights. Please feel free to contact me directly with questions or observations: email@example.com. If you are attending SFIG Vegas 2018 at the end of February and would like to chat, please schedule a meeting with us at the event.