Lending Briefing: The 2021 credit market recovery and Klarna’s annual results

Credit cards and personal loans were some of the products that took the biggest hits in those early months of the pandemic – consumers just simply didn’t need as much credit, as spending decreased. Another impacting factor was the influx of government stimulus in the form of transfer payments or enhanced unemployment benefits. 

Moreover, consumers turned to loan accommodation programs, and questions on how those consumers would perform once they exited those programs added to the uncertainty. As a result, lending to below prime consumers was suppressed and financial institutions turned their focus to the prime areas of the market to help mitigate risk.

But the industry started regaining health last year, with some lenders quickly returning to pre-COVID-19 origination volumes while others took a more measured approach. 

Personal lines

Personal-focused lenders opened doors for business this time last year thanks to a confluence of macroeconomic factors — including healthy consumer balance sheets and a return of consumer spending — triggering a rapid growth in demand for their products. 

Origination volumes for the segment are estimated to have been 37% higher than 2019 levels, with some lenders seeing origination volumes expand by several multiples, according to S&P Capital IQ.

LendingClub, the largest digital lender in S&P Global’s focus-list, originated over $10.4 billion in loans in 2021 - a 139% increase year over year but still below the $12.3 billion originated in 2019, which it expects to exceed this year. The company has originated over $70 billion in loans since inception, predominantly focusing on the personal lending space. 

Healthy credit trends such as record low delinquency rates in non-prime consumers are encouraging lenders to expand their offering to the subprime risk tier, according to TransUnion’s latest Credit Industry Insights Report. 

“They’ve gotten very comfortable with the fact that consumers’ credit standing didn’t collapse as unemployment jumped. Despite the uncertainty, consumers continued to perform very well on their credit, and that’s what gave the lenders confidence to get back into the market in a bigger way in 2021,” said Charlie Wise, senior vice president of research and consulting at TransUnion. 

Commercial lending

In commercial lines, the pandemic caused some of the biggest contractions in the lending industry – organic origination volumes for small and medium-sized enterprise-focused lenders were down 60% in 2020. These have bounced back in 2021, but still lag pre-pandemic figures, according to S&P Global data. Nevertheless, they’re expected to experience the most growth over the next few years. 

Last year saw abundant liquidity from banks after a year of taking a more withdrawn approach. But this supply wasn’t exactly met by demand from businesses - these had sufficient capital set aside thanks to PPP proceeds and savings from pared-back operations. This created an imbalance in the market, pressuring banks to find new strategies for driving up yields. 

But signs of economic recovery encouraged corporates to invest and use their deposits, signaling a return to the loan market to fund their growth initiatives, according to Gita Thollesson, senior strategic business advisor at Q2.

Plus, the pandemic really forced banks to make the switch, as businesses needed to be able to conduct operations digitally, Thollesson said. 

And if digital operations make it easier to onboard a customer, removing the need for in-branch visits for signed paperwork, for example, there are new challenges to overcome in order to make that new business relationship stick. Clients can easily scan the web for the best rates, but there are other aspects of the lending agreement that they consider important, as well. 

It takes a lot of effort to win a new customer, and it can be an even greater hurdle to hold onto that relationship. Thollesson noted that in her series of discussions with banks, a relatively new term – primacy – kept popping up. A new target focus for lenders, relationship primacy is becoming a priority, but many still don’t have a clear strategy on how to monitor and measure progress.

Chart of the week

Buy now, profit later?

The Swedish BNPL player Klarna recently released its 2021 annual results, revealing a net loss of $735 million (SEK 7 billion) for 2021 - multiples higher than the $142 million loss a year before. 

Looking under the hood, the loss was mainly driven by higher general administrative costs which grew from $920 million in 2020 to $1.6 billion a year later.

But the fintech doesn’t seem to care too much about the bottom line at the moment, eyeing to seize the momentum in the BNPL space and go all in to become Europe’s most valuable startup. Klarna seeks to expand in new markets and widen its product portfolio, with its gross merchandise volume increasing 42% year-on-year to around $80 billion.

And Klarna has reasons to feel confident about this approach. Its main income stream - commission income – stood at $1.2 billion, 47% more than in 2020 and nearly three times the income generated in 2018. This was fuelled by new and expanding global retail partnerships and increasing consumer adoption, the fintech said, as the company recruited 46 million new consumers and extended its reach to 45 countries.

CEO Sebastian Siemiatkowski also encouraged Klarna customers to pay upfront by using Klarna Pay Now, in an attempt to defend against the wave of criticism brought onto the BNPL model that it can lure people into getting into debt.

“Let’s set the record straight once and for all. Consumers should first and foremost pay with money they have. Period. This is why we are continuing to expand our Pay Now option,” he said.

The company is reportedly weighing a new funding round that will value it at up to $60 billion, according to Bloomberg reports earlier in February. Klarna raised $640 million back in June at a $45 billion valuation.

What we’re reading 

• TransUnion’s new tools protect lenders while helping users improve their credit scores (Finovate)
• Square Loans originated $850M in SMB funding in Q4 (deBanked)
• The coming boom in metaverse lending for banks (Forbes)
• Buy now, pay later firms to refund fees as watchdog cracks down (Yahoo Finance)
• Unfair lending with AI? Don’t point just at us, fintechs and online lenders say (American Banker)

What we’re writing 

• Fraud is becoming the biggest headache in financial services
• Through its partnership with Airbase, Amex dives deeper into SMB banking
• Behind the new card partnership: Five questions with GM and Marcus by Goldman Sachs 
• Quick take: How the pandemic changed commercial banking
• Experian Go could change consumers’ relationship with credit
• How banks can tackle sustainable lending, in 4 charts