Online Lending During a Pandemic: Global Effects of COVID-19

Online lenders have historically offered consumers certain advantages when compared to brick-and-mortar locations. Perks such as heightened ease of use, quicker approval processes, and on-call customer service provided by online lenders give would-be borrowers an appealing alternative option to more traditional lenders, such as a bank or a storefront. For example, Now Loan in the UK are a comparison site comparing all personal loan and payday loan alternatives to UK borrowers and showing them the cheapest lender that'll accept them (based on lending algorithms). 

Historically, online lenders expect an influx in new loan applications when the economy drops and unemployment rates tick upward, helping more consumers than ever to meet their financial needs. But in today's economic landscape, the widespread effects of COVID-19 may be more than the online lending industry could have prepared for.

With millions of people staying home, unsure as to when their next paycheck will come - or if it will come at all - an enhanced focus on saving and stocking up on immediate necessities puts the online lending industry under a distinct disadvantage.

Online lending across the globe

A recent article by Crowdfund Insider states: "The online lending industry has probably suffered more than any other sector of Fintech during the COVID-19 crisis." According to a recent report by dv01, the US-based lending platform LendingClub has reported a 90 percent decline in originations during the pandemic. In the same breath, new payment impairments for online lenders across the US throughout May were the lowest on record since pre-2019.

Perhaps not surprisingly, the Chinese consumer lending market, previously growing at an impressive 16.3% rate in 2019, has been significantly impacted as the economy slows and lockdowns halt businesses throughout the country. Consumer borrowing in China is expected to slow down to 6.2%, as reported by GlobalData.

Mortgages are by far the hardest-hit - but consumer lending products across the board are expected to feel the effects of COVID-19. As Siddarth Agarwal, Practice Head of Financial Services at GlobalData suggests: "New retail loan applications would also see a drop as consumers become more cautious due to the growing economic uncertainty. Consumer spending will be impacted as more people will look to cut down on large value purchases and instead look to save money."

Alternative and online lenders in the UK are experiencing a similar downturn in demand during the pandemic. A press release from Monevo, a global fintech operating in the UK, US, Australia and Poland, points to two underlying issues: a significant increase in economic uncertainty and the decreased ability to spend money on products and services. See the excerpt below: 

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.

Even payday lending is not immune to the struggle of attracting new borrowers across North America. With payment terms contingent upon paycheck schedules, consumers are less and less likely to take out short-term loans.  Fears of contracting the virus have driven storefront loans to a historic low, with some locations reporting reductions in loan volume as high as 95%.  This has provided some opportunities for online payday loans in Canada as the risk of transmission is a non-issue online.    In a recent interview with The Canadian Press, Alan Evetts, a director of the Canadian Consumer Finance Association and an owner of My Canada Payday, reports that industry-wide numbers were consistently down by 84 percent during the first six weeks of the pandemic. "Things changed radically. The demand has been completely decimated by COVID," he explains.

Looking ahead: Online lending post-COVID

The implications of the online lending industry are far-reaching. Economies are driven by the money that consumers spend, and that includes the interest from taking out online loans. And for many, the appeal of borrowing with alternative lenders is a necessity, as stringent requirements on credit score, loan amounts, and repayment terms are restricting hallmarks of traditional brick-and-mortar lenders.

Loans from online lenders are often used by those who rely on crucial financial moves such as supplementing their paycheck, paying recurring bills, covering emergency expenses, or consolidating high-interest balances. As global economies struggle to get local businesses and income streams back up and running - and to recoup the collective faith in spending - online lenders face a steep mountain to climb.