Months into the pandemic, we are taking another look at the global digital lending market and its response to COVID-19. As we approach the last weeks of 2020, loan origination volumes are still significantly down compared to 2019 levels, but a few signs of a potential recovery are starting to emerge. At the same time, further consolidation among lending platforms is likely. Credit defaults have remained quite well under control, albeit the full effect of the COVID-19 shock on lending platform loan books remains to be monitored. Some fintech lenders have demonstrated great flexibility in expanding their lending activities under government-backed programs, which indicates a sound basis for further recovering lost ground in terms of origination volumes. Having access to an institutional investor base thereby continues to be key for digital lending platforms’ future growth.
Origination volumes & performance
We see an expectable decrease in origination volumes across the product palette, particularly for consumer loans and mortgage loans. This trend is manifesting and likely to continue for a short-to-medium term outlook.
In Indonesia, one of the largest digital lending markets in Southeast Asia, with more than 9bn in originated loans as of September 2020, credit demand is slowly returning to pre-COVID levels, but loan performance continues to worsen. TKB, a measure of non-performing loans (NPLs) after 90 days, increased 4.8% YTD, standing at 8.27% in September 2020. In January 2020, TKB stood at only 3.6%.
Looking at Europe, origination volumes are also regaining pace. For Mintos, one of the largest European players, monthly originations in September stood at 87m EUR (Euro-Area only), a volume comparable to October 2018 levels. Nonetheless, the development marks a steep recovery from 40m EUR in April, especially since several loan originators listed on the Mintos marketplace have been defunct or closed operations during the summer.
Finland-based digital lender Fellow Finance also shows a reduced amount in funded loans, standing at 11.4m EUR in October 2020, down from 15.5m in January, but up by about 37% from the April low of EUR 8.3m. Since average interest rates have been raised by roughly 2% across the board since Q2 2020, demand for new loans has been sluggish. Nevertheless, a significant amount of loan applications remains available for funding, and further investment interest following the higher rates is likely.
Loan performance across the digital lending segment is holding up reasonably well so far. With extended repayment schedules and extensive restructuring, some established lenders have managed to contain pre-COVID adjusted defaults. Still, we observe that delinquencies are starting to rise across outstanding loan origination vintages for several fintech lenders. With tighter credit conditions and modified risk assessment models, new loans originated after the COVID shock in April are performing seemingly well. However, the evolution of default rates across the loan book remains to be monitored in the upcoming months.
Collaboration and institutionalization
Apart from demonstrating the need to rapidly deploy funds through technology, the pandemic has also invoked an unprecedented wave of collaboration between governments and Fintech companies. French SME lender October secured almost 160m EUR in support of European SMEs. The platform is now offering state-backed loans to French companies in the tourism sector as well as state-guaranteed loans to Italian SMEs. The Danish lender Flexfunding has also secured state-support, now offering specialized debt-instruments to Danish companies. In the UK, Europe’s most established digital lending market, the Coronavirus Business Interruption Loan Scheme (CBILS) has already accredited more than 100 bank and non-bank lenders to help UK’s small businesses affected by the pandemic in accessing finances.
Positive investment signals in Fintech lenders also come from the private sector. Germany-based SME lender Creditshelf recently set up a new direct loan fund, backed by its founders and EIF, to support German SMEs hit by Covid-19. In a similar fashion, the largest German Fintech lender, Auxmoney, secured 150m Euro from US private equity firm Centerbridge Partners to expand its leading market position and announced to be funding up to EUR 500m in loans along with other investors on its own marketplace.
With retail investors retrieving their capital during economic uncertainty, such collaborations are vital for Fintech lenders to continue distributing loans efficiently via their tech platforms. Qualifying as eligible distributors of government aid schemes also signals increasing acceptance of Fintech lenders into the mainstream.
The pandemic is the first real stress-test for the industry. While some digital lenders have found themselves at a crossroads, several established players have adapted well to the circumstances and struck new partnerships to cater to borrower segments in need of funding. Still, the most recent events have shown that access to a broad institutional investor base continues to be the essential growth driver of marketplace lenders. At the same time, loan selection and analysis will be essential to generate a solid investment performance for investors in digital lending.