Q3 2024 Review: Consumer Lending trends

Consumer Lending Origination Growth is Back, NCOs Edge Up

Originations

In the third quarter, consumer lenders capitalized on consumer demand for credit, reporting strong YoY origination growth. While those in the BNPL, cash advance and higher-APR lending space have reported YoY growth for several quarters, this quarter we saw major improvement in (under 36% APR) personal loan-focused lenders.

Kicking things off, SoFi kept up its strong origination growth, up +22.6% YoY, driven by personal loans. Upstart +29.8%, LendingClub +26.9% and OneMain +13.2% all reported double-digit YoY increases after reporting YoY origination declines in the second quarter.

Oportun has shown improvement in origination volume, roughly flat YoY in Q3, compared to double-digit declines in both Q1 and Q2. This improvement comes even as the lender has maintained tight credit standards, improved its CAC, down (24)% YoY, and decreased average loan sizes by 18% YoY, a $(731) YoY decline to $3,244.

After several quarters reporting YoY declines, Upstart returned to growth, with CEO Girouard attributing much of the growth to the latest version of its model (Model 18). Upstart’s conversion rate rose to 16%, from just 10% a year prior. In addition, the fintech launched its T-Prime lending program to enable banks and credit unions to reach super prime borrowers (scores above 720).

LendingClub returned to origination growth by leaning on its structured certificates (in which it retains the senior portion and sells the residual) of originations came from structured certificate sales. Management noted that demand remained high, citing DV01 data that showed the spread between credit card and personal loan rates at a record high 750 bps.

OneMain was able to return to YoY origination growth, despite maintaining tight credit standards and higher pricing (loan originations’ average APR of 26.8% rose 10 bps YoY).

Compared to pre-pandemic (3Q19) levels, LendingClub (42.9)% and Oportun (11.6)% originations remain lower, while OneMain +1.5% originations were slightly higher.

Lenders that offer shorter-term cash advance products continued to report robust origination volumes, with Dave +45.9% and MoneyLion +37.6% YoY. So far, both Dave and MoneyLion have reported YoY origination growth north of 30% every quarter of 2024, as consumers, facing a high cost of living and sustained inflation, have turned to cash advance products. Both fintechs expect this growth to continue, with Dave raising 2024 revenue and adj. EBITDA guidance and MoneyLion expecting loan conversions to grow as interest rates come down.

Dave looks like it will add a second sponsor bank. In November, Dave announced it entered a non-binding letter of intent with a sponsor bank. Management had announced months earlier that it was in the hunt for a second sponsor bank. Currently, the fintech works with Evolve Bank & Trust, which has received a cease-and-desist from the Fed, was subject to a data breach, and is entangled in the ongoing Synapse bankruptcy process.

While Dave was recently sued by the FTC over alleged deceptive practices related to marketing and fees, management has stated that it is prepared to vigorously defend itself and believes it has a strong defense to the suit.

In October, MoneyLion launched MoneyLion Checkout, allowing consumers to search, apply for and complete transactions across 3^rd party financial products such as loans, credit cards, and savings accounts. The move builds on the fintech’s strategy of catering to 3^rd party products.

In December, it was announced that MoneyLion would be acquired by Gen Digital for about $1Bn. The deal represents a premium to the prior day’s close ($850Mn market cap), but below the $2.4Bn valuation it held when it went public in 2021 via SPAC. Gen Digital owns and operates cybersecurity brands such as Norton and Avast.

Moving on to BNPL-focused lenders, volumes continued to boom, with Sezzle’s Underlying Merchant Sales (“UMS”) +40.6% and Affirm Gross Merchandise Volume (“GMV”) +35.3% YoY. Both UMS and GMV measure sale/transaction volume on the company platforms, but do not represent revenue earned. The two fintechs were helped by greater consumer engagement, with Sezzle consumers’ purchase frequency up to 5.4x, from 4.1x a year prior and with Affirm’s transactions per active consumer up to 5.1x, from 4.1x a year prior. Top users are highly engaged, with Sezzle’s top 10% of consumers transacting an average of 77x/year.

The Affirm card has continued to gain momentum, approaching 1.4Mn active cardholders at quarter end, up +19% QoQ, and card GMV increasing to $607Mn, up +171% YoY and +20% QoQ. Affirm looks to further capture consumer spending, announcing in September that it went live with Apple Pay.

Sezzle announced that it entered a five-year banking program with WebBank, with the bank to serve as the exclusive lender to originate certain finance products. To note, Sezzle also partners with Sutton Bank on its virtual card.

Sezzle announced it would begin testing its On-Demand product which allows Pay-in-4 wherever Visa is accepted. Competitors Affirm, Afterpay, Klarna, Zilch and Zip all offer options to split payments “anywhere” (i.e. where Visa/MC are accepted). Additionally, most of the major card issuers (i.e. Amex, Chase) offer options to split larger purchases into installment loans post-purchase.

Second-look financing fintech Pagaya has benefitted from the BNPL boom. The company reported an +11.3% increase YoY, led by POS +67% YoY and personal loan volumes +15% YoY. Much of Pagaya’s POS volumes can be attributed to Klarna, a leader in the BNPL space. Klarna’s POS loans make up a substantial portion of Pagaya’s POS business. Under the partnership, Pagaya’s decision engine is integrated into Klarna’s user experience to take a “second look” at rejected applications. If Pagaya can approve any rejected Klarna applicants, it funds the loans via capital from its ABS investors. Despite growing its volumes, the fintech maintained average conversion rates below <1%.

Higher-APR lender Enova (offers unsecured installment and lines of credit with APRs 34-200+% depending on state and product type) reported a +28.0% YoY increase in originations and an 18.9% YoY increase in consumer originations. The lender reported robust growth in originations, even while marketing expenses as a % of revenue remained stable (20.4% in 3Q24 vs. 21.1% in 3Q23). Enova attributed its origination growth to consumer spending and confidence from small business owners.

OppFi, another higher-APR lender (average yield of 134%) grew originations by +11.8% YoY due to “bank partners’ expansion into additional states, increased demand through certain marketing partners, and enhanced lead evaluation capabilities driving higher quality applications”. The lender continued to focus on existing customers, with 53.2% of originations made to the cohort. CFO Pamela Johnson noted, “On an absolute basis, new customer originations for the quarter increased by 18.8% year-over-year, while existing customer originations increased by 6.3%. The year-over-year increase in new customer originations was a result of strategic credit and marketing initiatives designed to increase originations in lower-risk segments.”

Despite a rise in net charge-offs, banks have largely continued to grow their consumer loan books, driven by credit card loans. On a YoY basis, average consumer loan books grew +7.6% at Citi - Branded Cards, +2.0% at Citi - Retail Services, +1.4% at JPMorgan, and +1.0% at Bank of America, but were (1.3)% lower at PNC and (3.6)% lower at Wells Fargo.

While average consumer loans declined on a YoY basis at Wells Fargo, this was driven by declines in auto loans (15)%, personal loans (5)%, and home loans (4)%. These declines more than offset the +14% YoY growth in credit card loans.

Charge-Offs

Moving on to credit, all lenders (outside of higher-APR lenders) reported YoY increases in net charge-off ratios.

Nonbank lenders OneMain and Oportun reported increases in net charge-off (“NCO”) ratios (+65 bps and +10 bps, respectively) even as they maintained tight credit standards. While OneMain’s NCO ratio was higher YoY, it improved on a QoQ basis, due to the reduced size of its “front book” (originations post-August 2022 tightening).

Oportun also notched a QoQ improvement in NCO ratio and reported that its 30+ day delinquencies improved on a YoY basis, for a third consecutive quarter. Oportun CEO Raul Vazquez attributed the improvement to its new credit model, stating, “Improvement in our credit performance is being driven in part by our implementation of our V12 credit model, which leverages the performance data of our portfolio over the last two years under higher inflation.”

Despite serving a clientele more prone to delinquency, OppFi (900) bps YoY and Enova (60) bps YoY improved their NCO ratios. As we covered above, OppFi has focused on its existing customers. And Enova CFO Steve Cunningham noted, “Even though we don’t disclose our 1+ delinquency rate, the 1+ rate for consumer actually was down year-over-year.”

Oportun +380 bps, OneMain +214 bps, and Enova – Consumer +30 bps NCO ratios have all risen above pre-pandemic (3Q19) levels.

Turning to banks, all banks reported YoY increases in NCO ratios, with Synchrony +146 bps, Capital One +71 bps, JPMorgan – Consumer +36 bps, Bank of America – Consumer +33 bps, LendingClub +30 bps, Wells Fargo – Consumer +22 bps, Ally +19 bps, Citizens – Consumer +8 bps, and PNC – Consumer +7 bps.

Synchrony reported weakness in its higher credit consumers, with CEO Brian Doubles stating, “From a payment behavior perspective, we continue to see relative stability in our non-prime segment. Meanwhile our prime and super prime customers have continued to gradually shift from above minimum payment to minimum payment.” However, the company expects that credit actions it took from mid-2023-early 2024 will help NCOs decline.

Capital One’s rise in NCO ratio was driven by credit card, with its credit card NCO ratio up +118 bps YoY. While NCO ratios have risen, there is room for optimism, with CEO Rich Fairbank explaining, “The pace of year-over-year increases in both the charge-off rate and the delinquency rate have been steadily declining for several quarters and continued to shrink in the third quarter.”

Additionally, many bank consumer divisions’ net charge-off ratios have risen above pre-pandemic (3Q19) levels, with LendingClub +540 bps, Wells Fargo – Consumer +107 bps, Capital One +89 bps, Synchrony +71 bps, Ally +67 bps, Bank of America – Consumer +31 bps, JPMorgan – Consumer +19 bps, and Citizens – Consumer +1 bp. PNC was (17) bps lower than pre-pandemic (3Q19) levels but has grown home equity + residential real estate loans as a % of its consumer loan book from pre-pandemic levels. Looking at broader industry data, these types of loans have carried lower delinquency rates than credit card and auto loans and likely translate into lower net charge-offs.

Bank net-charge offs (in $ values) have also seen significant YoY increases, with Synchrony +39.2%, JPMorgan – Consumer +37.2%, Capital One +30.3%, Bank of America – Consumer +29.0%, PNC - Consumer +16.3, and Citizens – Consumer +13.3%. While LendingClub’s NCO ratio rose, its net-charge-offs were (18.9)% lower YoY. Looking at pre-pandemic figures, net charge-offs at consumer divisions eclipsed 3Q19 figures for Ally +93.6%, Capital One +78.1%, JPMorgan +52.2%, Bank of America +29.8%, Synchrony +27.2%, and Citizens +16.0%. Only PNC (5.0)% reported a decline in net charge-offs.

Deposits

Although the Fed has begun cutting rates, major banks continue to see deposits leave for higher-yielding alternatives, with consumer divisions at JPMorgan (1.8)% QoQ, Bank of America (1.1)% and Wells Fargo (0.6)% reporting QoQ declines in average deposits.

At the same time, we saw deposits grow QoQ at LendingClub +16.9%, SoFi +6.1%, Citizens +1.2% and Capital One +0.6%. LendingClub attributed its QoQ growth to an increase in high yield savings and CDs, while SoFi’s deposits were driven by an 11.5% increase in savings deposits (with an average yield of 4.35%).

Since obtaining bank charters, SoFi and LendingClub have benefitted from a lower cost of funds, with deposits remaining key to funding loans. While SoFi and LendingClub do not fund every loan from their deposits, being able to fund at a cheaper rate (SoFi 4.19%, LendingClub 4.79% average yield on interest-bearing deposits) can aid profitability. SoFi was able to reduce warehouse facilities utilized at a 220 bps lower rate which translates to roughly $500Mn in annualized interest expense savings.

While not a direct comparison, nonbank lenders that utilize other sources of funding (e.g. warehouse lines, ABS markets) have reported significantly higher cost of funds, with Enova’s cost of funds at 9.6%, Affirm’s at 7.7% and Oportun CFO Jonathan Coblentz disclosing an 8% cost of funds.

The cost of deposits has continued to rise for some banks, despite the Fed’s rate cuts, with Capital One +7 bps, Wells Fargo +7 bps, and Citizens +2 bps on a QoQ basis. SoFi (5) bps, LendingClub (2) bps and Synchrony (1) bp reported a QoQ decline in the cost of deposits.

With the new administration soon to take office, the likelihood of the FDIC’s proposed brokered deposit rule becoming finalized has diminished. As a reminder, in the wake of last year's regional banking crisis and the still-unfolding Synapse bankruptcy, the FDIC board voted 3-2 to issue a proposed rule that would effectively reverse the changes made in 2020 to brokered deposit rules. Brokered deposits, sometimes referred to as "hot money," are funds placed with a bank by a third-party agent or broker. Because they are perceived to be higher-risk, brokered deposits carry a higher deposit insurance assessment, and there are restrictions on banks that are less than well capitalized on using such funding. With Chair Gruenberg planning to step down at the end of the Biden presidency, it is expected that the FDIC board will flip from a Democrat to Republican majority and the odds of this proposal becoming finalized have greatly decreased.

Increased Number of Deals Drove Growth in MPL New Issue Volume

In the third quarter, demand remained strong in the consumer unsecured MPL market, with new issue volume +5% higher on a YoY basis and +27% on a QoQ basis. The YoY increase in new issue volume was driven by an increase in deals (13 vs. 11), while average deal size declined ($428Mn vs. $481Mn).

While many lenders (especially fintech lenders) continue to maintain tight credit underwriting standards, lenders have seen increased demand in the MPL market. Pagaya closed a $500Mn personal loan deal, its second AAA-rated ABS transaction, which was “well oversubscribed and executed at the lowest cost of capital since early 2022.”

Upstart CFO Sanjay Datta noted that, “In our return to the ABS markets this past month, we saw high levels of oversubscription and significant tightening of spreads for each class of bonds. These are the signs that the capital markets are returning to their core function and once again embracing risk in the pursuit of yield.” Additionally, he reported, “On the funding side of our platform, we see encouraging signs that the markets are becoming increasingly constructive. Liquidity in the banking and credit union sectors continues to improve and increasing numbers of lenders are dropping their required rates of return on our platform. On the institutional side, the large amounts of money that have been raised under the banner of private credit, initially earmarked mainly for corporate lending are now increasingly finding their way over to consumer assets.”

Related to the ABS market, Affirm CFO Michael Linford stated, “The market for forward-flow for whole loan purchasers is really, really strong right now. The credit performance that we've delivered over the past year and a half, combined with the real understanding of the value of the short-duration asset and the disciplined managers that we have at Affirm, have put us in a really strong position, where we think at or near the top of the pack of producers of these assets.”

Pagaya - $1,369Mn, GreenSky - $1,046Mn, Affirm - $750Mn, Mariner Finance - $425Mn, Cherry Technologies - $400Mn, InterVest Capital Partners - $342Mn, Republic Finance - $309Mn, Achieve - $263Mn, Reach Financial - $236Mn, Oportun - $223Mn, and Avant - $200Mn were among the most active players in the space in the third quarter.

2024 cumulative new issue volumes continued to outpace 2023 levels and have broken out to outpace 2022 levels. Through October 2024 cumulative new issue volume of $18,404Mn has outpaced 2023 levels by 41% and outpaced 2022 levels by 14%. Through October, we have seen 49 consumer unsecured ABS issuances, already more than the 38 issuances in all of 2023.

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