After growing by close to 30 per cent in 2016, asset-backed securities (ABS) surged ahead close to 80 per cent by the end of 2017. That momentum is poised to continue in 2018, with technology playing a key role, eOriginal’s director of fin-tech strategies John Jacobs said.
Mr. Jacobs helps eOriginal’s clients with thought leadership and developing a digital strategy for lending and financing processes.
One area off to a good start in 2018 are auto loan and auto lease ABS, Mr. Jacobs said. Normally based on customer payment flow from a specific pool of loans or leases, they are highly liquid and a significant portion of the ABS market. While there there were not as many deals overall in 2017, the volume of those that did occur was significant, Mr. Jacobs said.
“It was the biggest January for auto ABS that occurred in some time. Roughly $15 billion was issued into the secondary market. There are good near and non-prime deals.
“The demand for auto ABS is there. It will do well.”
One sector that is only scratching the surface of its potential is point-of-sale (POS) lending, Mr. Jacobs said. While early efforts simply focused on digital signatures that allowed transactions to be electronically approved, POS lending opens up entirely new avenues or financing for a receptive audience.
“Consumer demand is there,” Mr. Jacobs said. “Research on millennials shows they are comfortable with a term loan for a specific purpose as opposed to an open line of credit.”
The impact of this shift has yet to be felt but Mr. Jacobs said tech savvy firms are starting to grab market share and have so far put good loan volume under their umbrella without credit card issuers recognizing it. Watch how credit card issuers react to that as transaction costs such as application fees need to be addressed. Merchants enjoy lower fees as some are offloaded onto the borrower.
“There’s a trade-off,” Mr. Jacobs said. “The merchant pays some of it and the borrowers does too, but the borrower saves overall and the merchant sells inventory.”
Expect fin-tech/bank partnership announcements to continue throughout the year, Mr. Jacobs said. The usually happen in one of two ways. The first is because fin-techs tend not to be chartered they partner with banks to issue original deals.
“I really think that’s going to take off,” he suggested. “There’s a natural partnership where there’s a lot of benefits. Banks have access to cheap lending capital that fin-techs otherwise find expensive to access.”
Banks in turn are attracted to fin-techs because of their ability to quickly deploy technology. There’s a natural synergy as fin-techs can provide that technology.
Save for two or three large players with bank aspirations, most fin-techs should grasp how hard it is to steal market share from the country’s largest financial institutions, Mr. Jacobs said. Focus on being a strong service provider and offering your services to banks.
Especially credit unions and regional community banks. The sector stakes its claim on strong local service and can look to technology to improve that experience.
“Small institutions have better service and more touchpoints,” Mr. Jacobs said. “Using technology to add to that to give a better experience is really critical to community banks moving forward.”
More fin-techs are differentiating themselves from banks by providing financial literacy education that helps borrowers avoid overdraft fees (a billion-dollar revenue source) and learn how to save and budget.
“Many have taken the next step by consulting with their base and having financial advisors discuss products and speak with borrowers about debt.”
While a recession is never welcome, it does produce some positive side effects, Mr. Jacobs said. Whereas few wanted to lend to many a few years back, institutions are now competing to attract the borrower.
Can’t have a conversation and not discuss the blockchain, which is in its early stages with conservative financial institutions, Mr. Jacobs said. As they wade through the buzz those institutions want to see clear use cases with demonstrated results provided by a few dominant players that bring the confidence their system will be able to communicate with their peers.
“We’ll help financial institutions standardize their technology for the move into blockchain,” Mr. Jacobs said. “We’ll help them get there. We’re part of the solution.”