The growing demand for small and medium loans
RFi Group chief operating officer Alan Shields looks at the potential opportunity in the personal lending market against the backdrop of a growing buy-now-pay later sector.
We continue to see the inexorable rise of the ‘buy now pay later’ (BNPL) market. It seems that almost every week we see the entrance of a new player – think Latitude's new BNPL play and and flexigroup's product pipeline.
As of June 2019 RFi, data shows that 31 per cent of consumers have used a BNPL service in Australia.
RFi has had a keen interest in the personal lending market for more than 12 years.
Arguably, we have a greater level of information about personal lending in Australia than we do about any other area of financial services. And this affords us some great insights.
Principle in my mind at the moment is the rise that we have seen in demand for loans of under $5,000.
Whether this demand has been driven by the growth in BNPL-style products on the market or by some other need that is emerging is as yet unclear.
What is clear, is that if you go to a mainstream lender for a loan of less than $5,000 then they can’t help.
So the question is, how significant is the demand?
There is opportunity to meet a need in the market; an opportunity to offer consumer choice; an opportunity to grow in a market that is clearly not stagnating
RFi’s Australian Consumer Lending Council (ACLC) research program shows that since June 2018 the proportion of current borrowers with a loan under $5,000 has risen from 10 per cent to 18 per cent, effectively almost doubling.
Further, the proportion of prospective borrowers looking for a loan of less than $5,000 has more than doubled during this time, rising from 10 per cent in June 2018 to 22 per cent in June 2019.
I would say that this constitutes significant demand.
These smaller loans are typically only covered by what we have come to know as payday lenders or microfinance providers.
They are regulated as Small Amount Credit Contracts (SACC) or Medium Amount Credit Contracts (MACC), offer loan terms of between 16 days and 1 year (for SACC) or 2 years (for MACC) and often attract huge interest rates.
So, who is taking these loans out?
RFi research shows that it is the millennial segment and in particular, those under the age of 25, that have no access to credit cards or other mainstream products.
BNPL is typically positioned at the SACC end of the credit spectrum and I do wonder if some of the demand in this SACC space is driven by a need to pay out BNPL plans that might have become an issue.
However, in the MACC space, the competition is smaller and consequently for the average consumer that has no credit card, there is not a great deal of choice. The lender of last resort is king here.
So, is there opportunity here for mainstream lenders?
Undoubtedly. There is opportunity to meet a need in the market; an opportunity to offer consumer choice; an opportunity to grow in a market that is clearly not stagnating.
The full report will be included in the October edition of AB+F.