Canary in the Coal Mine? COVID-19 Crisis Having Severe Impact on Consumer Credit Markets as Online Lending Sinks

“We’ve seen a significant contraction in the market with a reduction of 30 to 40% in the demand for personal loans. It’s our view that the fall in demand is being driven by faltering consumer confidence due to job insecurity and economic uncertainty amongst other factors.” – Monevo

A release from loan comparison service Monevo, part of the Quint Group, indicates the market for consumer credit is experiencing a “significant reduction in the demand for personal loans.” The note should not come as any surprise as the COVID-19 crisis has shutdown most aspects of developed economies and people are in self-quarantine, only spending money on the necessities.

The Quint Group lists multiple well known online lenders as being past or present customers. Names include LendingClub, Marcus, SoFi, Avant, Zopa and more.

The note states that COVID-19 is having a severe impact in most all the territories where the company operates but more specifically, the UK and the US. To quote the company:

“we’re seeing two key themes play out since the outbreak of the virus; a significant reduction in the demand for personal loans combined with a contraction in the supply of credit across nearly all lenders. We’ve seen a significant contraction in the market with a reduction of 30 to 40% in the demand for personal loans. It’s our view that the fall in demand is being driven by faltering consumer confidence due to job insecurity and economic uncertainty amongst other factors.”

The Fintech says the desire to purchase some products or services that personal loans are typically used for has disappeared overnight.

Greg Cox, founder and CEO of both Monevo and Quint, states:

“It’s almost impossible to purchase a car under the current restrictions. but other loan purposes like holidays are also affected due to travel restrictions, while major home renovation projects are put on hold, and the house-buying process has effectively paused.”

Cox calls the crisis as creating a perfect storm. Demand for credit is tanking, meanwhile, lenders have either “paused lending completely or have severely restricted who they lend to by significantly tightening their criteria and relying to a far greater extent on manual underwriting.”

The #COVID19 crisis is creating a perfect storm for online lenders as well as consumers Click to Tweet

A one, two punch, that cannot be good for Fintechs that are undercapitalized.

Some lenders are said to be restricting credit to consumers that are self-employed or work in high-risk sectors such as travel. Other lenders are said to be allowing loans to occupations that are deemed to be safe.

In response, the FCA proposed a range of temporary measures designed to help customers with certain credit products who face financial difficulty as a result of the Coronavirus. These proposals include temporary payment freezes on loans and credit cards, zero interest overdrafts of up to £500, along with the guidance that consumers using these temporary measures should not have their credit rating affected. But what do the lenders do?

In the US, Congress passed the CARES Act – the largest economic stimulus bill in modern history and more than double the amount passed in 2009 for the Financial Crisis.

David Brooks, Monevo US Territory Director, says that US lenders are focusing on restricting customer acquisition volumes:

“Since mid-March, lenders have made significant changes to credit policy to offset risk or have paused new customer acquisition to assess short-term strategies. Defaults are the big risk and it is critically important for lenders to support enrolled consumers over the next 3-6 months.”

The drop in consumer confidence is followed by a drop in demand for personal loans.

In Australia,  the company explains they have seen the least impact to date with most lenders still operational and only just beginning to tighten criteria. The current controls and restrictions, although not as currently severe as in the UK, are affecting industries such as tourism, hospitality, and entertainment. Weekly lending volume as seen by Monevo remains strong – at least for now.

“We particularly expect lenders’ responsible lending criteria to focus on income stability over the coming weeks and months,” says Seb Haack, Monevpo International Development Director. “Overall, and despite the global turmoil, the Australian lending market, at the moment, appears to be holding.”

Poland, another market where Monevo operates, has experienced a temporary shutdown of most lenders as new legislation that was passed into law limits fees that lenders can charge on loans. Restrictions on the movement of people similar to the UK means Poland is closer to a total lockdown. Monevo says the changes in Poland may leave some lenders without viable operating models.

“Our initial estimation is that these lenders will come back online within the first two weeks of April,” adds Haack. “We expect that overall lending risk criteria is tightening the Polish industry as the economic outfall of the COVID-19 virus begins to take effect in Poland.”

Further disruptions and changes are anticipated in the coming weeks as the online lending industry hits uncharted territory.

As the saying goes, it is difficult to prepare for an unknown crisis. Online lenders may be the canary in the coalmine as systemic risk seeps into the financial services sector. The big question now is will the bail-out packages have the intended impact and save the global economy? And what about the people that can least afford to be without any income?

Monevo expects to continue to provide insight in the coming weeks as the lending industry attempts to remain afloat and hopefully right the ship.

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