JPMorgan Chase is enhancing its online auto-loan products by offering a new end-to-end service for finding and financing a car via a partnership with online car marketplace TrueCar.
The new service, called Chase Auto Direct, will be available to Chase customers in 30 states, with a nationwide roll out planned for 2017. It enables customers to find a car online, compare prices that others have paid for similar vehicles using TrueCar’s technology, and then apply for and secure a loan. Chase then sends the approved loan application to the dealer, where the customer finalizes the purchase.
Offering an end-to-end service may help it stand out in a crowded market. The US auto-loan market is a huge market, with outstanding loans worth more than $1 trillion in Q1 2016, according to Experian. But it’s also highly competitive as legacy players face a significant threat from newer digital banks like Ally, and marketplace lenders including Prosper and Lending Club — both of which offer specialized auto loans. Chase likely hopes its new service will give it an edge in this crowded market.
It’s not the first time Chase has partnered to access alt lenders’ technology. It has been offering small business customers loans powered by alt lender OnDecks’ technology since Aprilthis year. Partnerships are helpful in enabling legacy lenders to get new products out to customers faster and at lower cost than developing in-house. And we think that such partnerships could turn into acquisitions, once legacy lenders have established the technology works and the model is profitable.
Alternative lending in the US is particularly important for small businesseses, which represent 99% of US companies, 54% of total sales, and 55% of all jobs, according to the US Small Business Administration.
These businesses need capital in order to grow, but small businesses are underfunded — only half of small businesses with $100,000 to $1 million of annual revenue received at least some of the financing they applied for from large banks in late 2015. This is partially because banks have retreated from this segment because issuing loans to small businesses using the traditional underwriting model is expensive. This leaves a massive amount of unfulfilled loans that we estimate reached $96.5 billion in Q4 2015.
Alternative lending companies have stepped in to capitalize on the opportunity available in helping meet more small business’ lending needs.Alternative small business lending platforms use machine learning and digital tools to extend credit to a wide array of small businesses quickly and efficiently, particularly to those that have been rejected by banks. Alternative small business lending companies provide digital platforms that connect small business borrowers to capital using nontraditional means.
We estimate that alternative small business lenders originated $5 billion and had a 4.3% share of the small business lending market in the US in 2015. But alternative small business lending platforms will originate $52 billion and gain a 20.7% share of the total market by 2020, driven by the continued growth of new players, increased borrower awareness and interest, and most importantly, major partnerships with big banks.
Evan Bakker, research analyst for BI Intelligence, Business Insider’s premium research service, has compiled a detailed report on small business alternative lending that analyzes the market opportunity for alternative lenders, forecasts the market share and volume growth of alternative lending platforms, profiles key players, and addresses the main industry risks.
Here are some key takeaways from the report:
- Alternative lending platforms are in a position to capitalize on this underfunding and also take share from banks. These companies use machine learning and digital tools to extend credit to a wide array of small businesses quickly and efficiently. We estimate that alternative lending companies’ share of the small business lending market in the US will reach 20.7% by 2020.
- Alternative lenders are now partnering with banks and this will propel growth going forward. New lenders are finding opportunities to offer white-label services to major banks. We expect banking partnerships, like the one between JPMorgan and OnDeck, to add 7.7 percentage points to the alternative lending industry’s market share by 2020.
- A flurry of new lenders have entered the market, but it’s still early innings. A handful of small business lenders, from Funding Circle to Credibly, have entered the market and this is creating challenges as customer acquisition costs rise and alternative lending companies struggle to differentiate themselves.
In full, the report:
- Forecasts the market share and volume growth of the small business alternative lending sector, and breaks down the main growth drivers.
- Explains why small businesses are underfunded, and quantifies the market opportunity for alternative lenders.
- Defines the different types of platforms that alternative lenders employ, including their revenue models.
- Lists the advantages and disadvantages that alternative lenders have compared to traditional players.
- Overviews the key players in the industry and identifies their growth factors as well as the pain points limiting their growth.
- Pinpoints the key risks that could undermine the success of alternative platforms
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