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How does the consumer lending market in Europe affect Bondora?

The European consumer credit market is the most relevant market for Bondora and its trends and developments will play a significant role in the success of Bondara’s business. The development of new technological solutions, changes in economic conditions, and the growth and acceptance of online lending are among the key driving factors that have reshaped the European consumer lending market. Bondora’s business model is designed to capitalize on these trends and developments.

The total market size of the European consumer credit was €1.07 trillion in 2014; after reaching €1.16 trillion in 2008, it contracted for five consecutive years. That said, the market appears to have stabilized; it experienced only a 0.3% year-on-year decline in 2014.[1] For 2015-16, expectations were for moderate growth overall, though with significant differences among individual countries in the region.

The European consumer credit market can generally be divided into three groups: Northern Europe, Continental and Southern Europe, and Eastern Europe.

Countries in Northern Europe, such as the UK, Ireland, Denmark, Finland, Norway, Sweden and Germany, have relatively high consumer credit penetration rates, with per capita volumes above €2,500. Finland is positioned at the lower end of the spectrum; at €2,563, per capita consumer credit is fairly modest when viewed from the perspective of its overall economy.

Per capita volumes are less than €2,500 in the Continental and Southern European countries, which include France, Austria, Netherlands, Spain, Italy and Portugal, while the consumer credit market is least developed in Eastern Europe, where per capita volumes are less than €1,000. The European Union average is €2,100.

Recent market dynamics have contributed to variations among and within the three groups, with relatively faster growth being seen in several Eastern European countries, the UK, Finland and Sweden. In contrast, certain countries in Southern and Eastern Europe are experiencing declines.

Following the 2008 global financial crisis, the banking sector witnessed a shift in market dynamics, driven by increasing regulation (e.g., Basel III and CRD IV). The changes have forced banks to improve their balance sheets and focus on core products in domestic markets, and have led to an overall decline in the appetite for credit risk. Consequently, it has become harder for individuals to obtain credit from commercial banks. Because demand for consumer credit remains strong, many prospective borrowers have turned to non-traditional lenders.

The banks’ retreat from consumer lending and technological evolution have been driving forces behind the emergence of alternative lending models and new players. Digital channels offer opportunities to reduce costs and improve customer targeting, as well as the ability to capitalize on advanced scoring and underwriting methods.

As a result, digital lending has been a credit market game changer. Among the features that distinguish digital lending, which has an estimated addressable market of €760 bn,[2] are new players offering a pure online experience, the ability to tap into additional data sources when evaluating potential borrowers, and the ability to consolidate different aspects of lending.

Perceptions about non-traditional lenders have also been improving as they have sought to better their image and that of the sector. As they make inroads in presenting themselves as credible alternatives to traditional unsecured consumer lenders, and as banks continue to shift their focus from expansion to extracting value from existing customers, non-bank lending is expected to become an increasingly important aspect of the consumer lending business. The fact that banks in several markets have begun cooperating with new entrants by capitalizing on their technological advantages and financing loans underwritten by non-traditional lenders will likely bolster this trend.

Aided largely by expansive monetary policy in Europe, and in the eurozone in particular, economic growth and consumer confidence have been spending more time in positive territory in recent years, which should continue to spur moderate growth in the consumer lending market. The pace of expansion is expected to mirror that of the overall economy, and with the odds of an expansive credit boom appearing to be low, market dynamics should remain relatively healthy.

Europe’s evolving consumer lending landscape has led to additional regulatory scrutiny and altered perspectives on regulation in many countries. This stems from a desire to increase financial system stability at the time when non-traditional lenders are accounting for a large and growing share of credit activity and to ensure consumers are adequately protected. In light of this, the regulatory risks and other aspects of operating in this market are becoming much more important.

To succeed in such an environment, lenders must be able to adapt quickly to new regulations and changes in product offerings and requirements, and direct ever greater attention to the risk management and data-related issues that Bondora has been strongly focused on.

[1] Source: Overview of the European Consumer Credit Market, Credit Agricole, July 15, 2015

[2] Source: Digital Lending: The 100 Billion Dollar Question, Autonomous Research, January 2016.