The Global Underbanked Opportunity
Problem: Credit Access and The Underbanked
Despite the growth of fintech, large portions of the global economy still have limited to no access (if any) access to credit regardless of their actual credit quality. Even in developed economies, traditional banking has struggled to keep pace with changes in technology and borrower behavior leaving a “funding gap” of nearly 4 trillion USD worldwide and 2.6 trillion in developing countries alone.
Since the Global Financial Crisis in 2008, banks have substantially reduced the volume of credit they are willing to extend to a wide range of borrowers, particularly retail customers and small businesses. In addition, regulator changes enacted primarily in the U.S. and Western Europe, have generally curtailed the amount that is allowed to be lent to credit segments such as consumer and small business loans.
Solution: Marketplace Lending and A New Asset Class
These changes have triggered a massive wave of bank disintermediation, as new players leverage highly efficient technology platforms to lend to borrower segments once served exclusively by banks. These marketplace loan originators make loans at lower cost by cutting out the middleman and often connect borrowers directly with investors. As a result, investors are now able to purchase loans that were previously unavailable or difficult to access directly. This has resulted in a new fixed income asset class offering alternative risk premia uncorrelated with traditional markets also opening up to investors.
As quantitative easing has compressed yields across the traditional fixed income spectrum (Sovereign and Corporate), investors have been forced to increase duration or decrease credit quality in the pursuit of higher yield. Marketplace loans offer a potential alternative where investors in digitally-sourced direct lending can construct a portfolio with
- Yields comparable (or higher) than global high yield credit
- Defaults comparable to investment grade corporate bonds
- An average tenor less than 2 years.
Source: J.P. Morgan, Blackrock, Barclays, S&P: 3/31/2018
Marketplace lending has experienced significant growth since its inception shortly after the 2008 Global Financial Crisis whereby regulations imposed on traditional lenders significantly curtailed both lending appetite and ability. Many investors are aware of platforms such as Zopa, Lending Club and Prosper that have grown and flourished from increased adoption and technological advances have led to more robust and secure platforms.
Source: Morgan Stanley, CFPB, Federal Reserve
A similar trend has expanded the online origination model beyond personal unsecured loans to multiple loan segments and geographies including emerging market countries. Traditional banking penetration in emerging economies is generally lower than developed markets, owing to a variety of factors including a large presence of state-owned banks only lending to other state-owned or controlled institutions and the rural or remote nature of many populations making it cost-prohibitive for traditional banks to operate local branches. Marketplace loan origination throughout China alone has outpaced the US, and other regions throughout the emerging markets have seen the rapid growth of technology empower the individual and small business borrower to fully realize their potential in the local economy.