The United States Digital Lending Market is expected to reach a CAGR of 11.4% during the forecast period (2021 - 2026). Owing to the COVID-19 pandemic, SMEs in the region are facing challenges to raise funds during the crisis to keep their businesses operating. Digital Lending is expected to find several opportunities, especially amongst SMEs for growth and adoption. Further, during the COVID-19 pandemic, the government aims to support the people. In the United States, the Paycheck Protection Program (PPP) asks fintech lenders that qualify with specified requirements to underwrite loans and has deployed USD 511-billion to date.
- With the increasing on-demand services and faster decisions, digital lending platforms are changing the face of commercial lending. However, digital approaches differ as banks transform their operations to keep up with online industry peers.
- While digital disrupters have been busy spending the time to ease single loan applications, conventional banks could be missing a trick by digitizing only the standard areas of their commercial lending business.
- United States is one of the largest and most advanced markets for digital lending, globally, due to its early adoption of digitization in various sectors. Also, factors such as the strong economy, robust presence of prominent solution providers, coupled with strong investment by government and private organizations for the development and growth of research & development activities, are poised to drive the demand for digital lending in the region.
- Funding is a crucial element of the digital lending business model. There are three major funding models used by digital lenders who are Marketplace lender, Balance sheet lenders, and bank channel lenders. Several digital lenders have been tapping multiple funding models as they grow.
- Further, banking institutions retain certain fundamental competitive advantages. Arguably the most important is their access to insured deposits, which affords them low-cost capital. Regulatory concerns have likely caused banks to hesitate when adopting new technologies, but banks are increasingly looking for points of entry to the fintech space. It is expected that many banks will opt to partner with existing fintech companies to have their cost advantages with the fintech' technological capabilities.
- By combining their technological expertise with banks' lower cost of capital, these partnerships could enable banks to provide more efficient customer experiences at lower rates, as well as open them up to previously untapped customer segments. Also, in the United States, platforms engaging in credit origination can be subjected to licensing requirements in each state where they get operated. For this reason, many platforms partner with the banks to originate loans agreed online.
Key Market Trends
Increasing Number of Potential Loan Purchasers with "Digital Behavior"
- According to U.S. Small Business Administration, in the consumer credit segment, there are USD 4 trillion in outstanding consumer loans in the US. for small businesses, and there are USD 310 billion in sub-USD 1 million loans to small businesses. Additionally, the US Federal Reserve Bank of NY estimates that there is unmet credit demand of approx100 billion, resulting from banks' unwillingness to make small-dollar loans. Technology-led digital lenders are garnering interest in their ability to partner with banks in order to meet the untapped demand.
- 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% in the United States use an auto-selection process. In facilitating credit, fintech platforms can provide monitoring and servicing functions which are similar to those of the traditional credit providers such as banks.
- Most consumers use fintech providers for refinancing or consolidating the existing debts, but some use it to finance their major purchases (such as vehicles or real estate). Borrowing by students for funding higher education is prominent in the United States.
- On the business side, various small and micro enterprises typically seek funds for working capital or any 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.
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 of the companies, such as Square and PayPal, entered digital lending from adjacent fintech segments, and 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 investment 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.
United States Digital Lending market is observing an increase in number of investments and M&A activities by various global enterprises to gain access in the market. Vendors are increasingly spending on gaining consumer base by offering numerous benefits. In addition, such investments are strong part of their competitive strategy. Access to the distribution channel, already present business relations, and better supply chain knowledge, along with the self-owned platform, give the established tech giants entering into the market advantage over the new competitors.
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