March 27, 2014

Changes in credit market structure increases internet-based loan originations

Consumers have been borrowing more through the internet as credit markets undergo significant structural changes. Banks are benefiting as purchasers of some of these loans.

The use of the internet as a means to obtain a loan has been increasing at a rapid pace. Banks exited the subprime space as an aftereffect of the financial crisis. Short term, higher interest rate, loan shops proliferated to fill the void and now the internet is becoming a greater force in this area.

Consumer use of short-term credit products
Many subprime borrowers had to take on short-term loans with high borrowing costs. In addition, many consumers have been making greater use of other short-term credit products than they did before, Lisa McGreevy, president and CEO of industry representative group the Online Lenders Alliance, wrote in American Banker. Ms. McGreevy believes the online lenders can successfully serve this sector.

The market expert noted that in March alone, she has spoken with roughly a dozen different industry groups about online lending that involves small amounts. She emphasized that the various stakeholders in these activities - including market participants, industry representatives, consumer organizations and elected officials - should work together to create the best possible financial products.

Government agency concerns
Regulators such as the Consumer Financial Protection Bureau have become concerned about the proliferation of this short-term credit, and the author noted that the CFPB is currently looking into payday lending. In addition, the Senate Banking Committee has been investigating what benefit consumers derive from alternative financial products.

Government agencies are concerned about the borrowing costs of this short-term debt, and are also worried that consumers don't understand all the fees and rates involved with these financial products.

It's important to note that while peer-to-peer lenders have sated some of the demand for online financial products, banks and other financial institutions have provided much of the needed funding.

The internet channel is becoming an efficient way to make loans. While it is still early in the product development life cycle for many of these firms, it's clear that many banks are looking into this.

Garnet understands consumer lending, banking and alternate origination channels, and has spent decades developing relationships and bringing new products to market. Garnet's expertise can help buyers and sellers feel confident they are making the right choice in setting up sale relations in these and other financial areas.