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December 10th, 2020

Market Views

Google’s “Year in Search 2020” is a moving compilation of the year viewed through the global community’s online search activity. The world typed billions of queries, and many started with “Why?” The montage focused on 2020’s challenges and big moments – pandemic, justice, natural disaster, calamity.  Individuals and societies were tested, often in ways they had not imagined. Often, they asked “why?” in their search for answers and understanding.

In our mundane world of finance, we asked many questions during the year: Why do over $60 trillion of global bonds trade close to or below 0% real yields?  Why are most people unaware that the average rate on a U.S. credit card is around 17%?  Against this backdrop and coupled with explosive online adoption, why do many fixed income allocators still shy away from alternative credit enabled by Fintech?  Why do numerous allocators choose to embrace higher-risk, large-balance, direct lending over small balance, short duration, amortizing digital private credit assets?  Why does the U.S. consumer borrower continue to be the perennial whipping child, despite decades of pretty good credit statistics?

Conversations with fellow finance practitioners, allocators, and investors underlined one central theme that seemed to explain general ambivalence to fintech-enabled private credit: it has not been tested.  The concern is that “it” – loans to the real U.S. economy made up of millions of consumers and micro businesses dispersed across the country – had not experienced a meaningful recession or stress like the great financial crisis of 08-09 or the dot-com bust of 01-02. This nurtured a fear that this borrower profile would suffer losses far above underwriting expectations.

The stress test came in 2020 when the world experienced an exogenous shock with alarming suddenness and synchronicity. Yet, amidst the cacophony, small balance, short duration amortizing loans did not see loss rates spike. In fact, they were standout performers, mainly because their very features can be ideal antidotes to idiosyncratic risk. Furthermore, Fintech-enabled loans introduced fact-based decision-making levers that were not previously possible in prior crises, such as loan-level transparency that helped investors gauge true risk exposure, immediate outreach to borrowers that helped servicers tailor effective payment relief, and targeted delivery of government PPP stimulus dollars to small businesses in dire need.

For those still skeptical, we ask them: Why?


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