The short answer is that no one knows for sure. Information on the industry is limited and quantifying it is difficult, as a report from Fitch Ratings released yesterday noted. Nonetheless, it is a space that’s been attracting attention as well as private equity, particularly with installment and peer-to-peer lending.
In 2012, loan volume from alternative lenders stood at around $591 billion in the United States. That volume generated $84 billion in fee and interest revenue that year.
And of that $84 billion, which segment generated the most fees and revenue?
Auto. Automotive lending contributed an estimated $34 billion in revenue, or 40% on $199 billion of total auto loan volume.
And here’s the even bigger kicker from Fitch.
Growing competition from nontraditional market participants such as those in the alternative financial services industry could put downward pressure on mainstream financial industry profitability, the report says.
That in turn could lead to less underwriting discipline and result in increased leverage as companies seek to enhance returns and fund growth opportunities and shareholder distributions.
Filling a Need
There is no doubt that consumers are looking for new ways to borrow money. Fitch cited a 2011 FDIC report called the National Survey of Unbanked and Underbanked Households that found 23% of American households had used AFS transaction products, such as check-cashing, while 6% used AFS credit products.
Demand for those products is driven by the estimated 68 million consumers classified as underbanked or unbanked, according to a 2013 FDIC survey.
That said, there are some potential downers on the horizon for the alternative lending set as well. Fitch said the fragmented AFS space remains highly susceptible to new and more onerous rules and regulations that could have a material adverse impact on the viability of the AFS business model.