As a global fintech that operates in the UK, US, Australia and Poland, we're witnessing first-hand the effects that the global shutdown is having on personal lending around the world.
The COVID-19 crisis is having a severe impact on the consumer credit market in almost all of the territories in which we operate. In the UK and the US particularly, 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.
Additionally, under the current restrictions, one thing remains clear. The ability to actually purchase some products or services that personal loans are used for, has virtually disappeared overnight, further driving down demand.
"It's almost impossible to purchase a car under the current restrictions," says Monevo CEO and Founder, Greg Cox, "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."
A reduction in the demand for personal loans alone would be significant and unprecedented, however we're seeing this trend combined with a marked contraction in the supply of credit across nearly all lenders, creating what Cox describes as "a perfect storm".
With the UK gripped by COVID-19 and life as we know it entering a state of paralysis for an undefined time-frame, it's perhaps unsurprising to also see UK lenders making widespread changes to their credit and risk appetite, and restrict the supply of credit.
This contraction in supply has followed two distinct trends. 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.
"We're now starting to hear discussions from lenders on how they view certain 'at risk' employment types within their existing loan books in terms of payment performance" says Monevo Commercial Director, Tim Kirby.
For some lenders, these changes mean excluding or restricting lending to consumers that are self-employed or work in high-risk sectors such as travel. Other lenders are restricting lending to consumers who fall under the occupation of key-workers, a classification of workers that the UK government deems vital to public health and safety during the corona virus lockdown.
Industry regulators have been swift to respond and yesterday [April 2, 2020] 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 corona virus pandemic.
Their proposals to the sector 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. Time will tell if these proposals affect lender behaviour further.
With widespread measures now put in place to fight the pandemic, travel restrictions and business closures are having a significant impact on the US economy.
In response, the US government passed the CARES act last week, now the largest economic stimulus bill in modern history and more than double the amount passed in 2009 for the Financial Crisis.
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," explains Monevo US Territory Director, David Brooks. "Defaults are the big risk and it is critically important for lenders to support enrolled consumers over the next 3-6 months."
We've noticed a considerable drop in demand for personal loans in the US, again driven by falls in consumer confidence, and the fact that many reasons for taking out a personal loan are now obsolete given the purchasing restrictions that remain in place.
In Australia, we've 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.
Despite this, International Development Director Seb Haack who oversees the Australian territory, explained that weekly credit demand volumes on Monevo continue to be strong while the platform continues to match customers to the right lender across an array of credit risk criteria.
"We particularly expect lenders’ responsible lending criteria to focus on income stability over the coming weeks and months," says Haack. "Overall, and despite the global turmoil, the Australian lending market, at the moment, appears to be holding."
Given the economic and social impact of the restriction measures implemented to mitigate the spread of the virus, we expect that credit risk appetite will continue to narrow as lenders evaluate the current impact to new customers and their existing portfolios.
The spread of the COVID-19 virus in Poland remains lower than in other European countries due to the Government’s quick response to close schools and borders early in March. Nonetheless increasing restrictions on the movement of people this week took the country closer to a total lockdown similar to that in the UK.
New legislation was passed into law this week which limits fees that lenders can charge on new loans. This has caused a temporary shutdown of most lenders while they update their systems, products and marketing to reflect the new restrictions.
This change is likely to leave some lenders without viable operating models, which in turn may increase pressure on the supply of personal lending in Poland, while lenders quickly adapt their loan offers to maintain profitability and assess risk.
According to International Development Director, Seb Haack who oversees the Polish territory, Monevo has begun to see some lenders pause lending or tighten criteria.
"Our initial estimation is that these lenders will come back online within the first two weeks of April," commented 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."
Globally we're currently in uncharted territory. While we've already seen a significant impact to personal lending, we expect further disruption and changes to continue in the coming weeks.
The impact of the pandemic on consumer lending is rapidly changing on a daily basis, and in our next roundup, Monevo will continue to deliver more insights from the lending sector.