The banking industry today is faced with a list of complex, ever-changing challenges. With industries such as commercial real estate under duress, credit shifting across multiple sectors, and a premium on liquidity, many lenders and institutional investors are re-evaluating traditional asset strategies and finding new means to deploy capital. Since the typical investment in securities and long-term loans may end up yielding suboptimal results, investors have turned to another investment option in the form of consumer credit.
Consumer credit has emerged as one of the viable alternative investments for institutions looking to balance their long-term duration investments with lower-yielding fixed-income portfolios. This has increasingly been witnessed in subclasses such as personal loans, which have proved to be a solid investment option due to their high yields, short durations, and solid returns. This article offers a detailed exploration into what has propagated this trend and how investors are accessing this space.
As of 2025, the consumer credit market is projected to grow to $12.17 trillion thanks to its varied asset offering. This asset class offers investors access to a wide range of opportunities ranging from traditional personal loans and residential mortgages to newer products like buy now, pay later (BNPL) loans that provide exposure to the creditworthiness of consumers. Here are some of the reasons why investors are doubling down on consumer credit.
Seeking Higher Yields in a Tight Return Environment
Tough economic times have led to low returns on traditional fixed-income instruments. This has massively impacted profitability, hence the need for alternatives such as consumer credit that deliver higher yields through assets like credit cards, personal loans, and BNPL. Some assets like personal loans have short duration periods ranging from 24 to 72 months while offering yields of approximately 6%-8%. This provides investors with a steady stream of income from credible borrowers. Statistics show that delinquency rates for personal loans are low and will keep trending downward across all risk tiers, making this an attractive investment option.
Using Consumer Credit to Diversify Exposure
Consumer credit behaves differently from sovereign or corporate debt in that it allows investors to spread risk and reduce the reliance on traditional lending. Long-duration and lower-yielding assets will continue to be part of the banking industry investment strategy. However, the addition of shorter-duration assets can help organizations balance their portfolios, increasing income streams while reducing the risks posed by each asset.
Leveraging Fintech and Underwriting Innovation
The banking industry has been continually evolving with the rise of the fintech industry and technological advancements. With advances in credit modeling, real-time performance monitoring and borrower-level data have made consumer credit more transparent, allowing investors to see the breadth of investment prospects. Additionally, these technological advancements provide institutions with stronger tools to manage risk, ensuring better returns on investment.
Accessing Credit Through Scalable Investment Structures
Institutions venturing into consumer credit are entering the market through asset-backed securities (ABS) or collateralized loan obligation structures (CLOs), where payments are backed by a specified pool of underlying assets, making consumer credit less risky. Private credit funds that package consumer loans with built-in protections elevate risks associated with said assets, making them a lucrative investment option. These offerings can also allow investors to create tiered risk options where the value and risk of an asset can be measured.
Aligning With ESG Strategies and Regulatory Momentum
Businesses that adhere to environmental, social, and governance (ESG) strategies not only make a positive impact on the community where they operate but are also more attractive to clients and prospective investors. Venturing into consumer credit supports financial inclusion and undeserved borrowers, making institutions appealing and in line with ESG strategies. Financial reforms such as Dodd-Frank and Basel III have made banks and lending institutions cut back on lending in certain sectors, creating a gap that can be filled by consumer credit. Moreover, this type of credit also plays a crucial part in regulation by increasing transparency and improving access for large investors.
Resilience of the Consumer Sector
Even in the most difficult economic cycles and challenges, the consumer sector has remained resilient, making it a reliable investment option. Profitable long-term investments are pegged on key economic factors, which may leave institutions struggling when there is an economic downturn. In such cases, profits can be supplemented by the consumer sector.
Why Investors Should Consider the Consumer Sector
In an uncertain economic and political climate, the lending and banking regulatory landscape is faced with many unknowns. Even the tiniest of changes in the macroeconomic landscape could completely shake up the industry. At such times of unpredictability, it is important for investors to bank on investments that have guaranteed returns. Since it can be hard to evaluate longer-dated investments, betting on shorter-duration investments like consumer credit provides a better option with compelling returns over a shorter time horizon.
What to Consider When Investing in Consumer Credit
There are several key considerations that investors need to make before taking on the consumer credit market.
For one, it is important to understand the different structures with different risk and return profiles. Knowing what to expect from each asset and the risk associated with it can help institutions make informed decisions about whether to invest in the said asset. Assets such as personal loans can be purchased on a passive or an active basis and have different tiers, i.e., bulk or individual. Understanding each component is crucial in determining expected returns.
Secondly, it is important to determine the institutional objectives and where an organization wants to play on the risk-return spectrum. Using the provided financial and technological tools can help investors determine the creditworthiness of each borrower and consequently know how this can contribute to their financial goals.
Is Consumer Credit the Future of Lending?
Increased economic uncertainty has put many institutional investors in a precarious position pursuing existing investment avenues, hence the need to look into new options. The macro headwinds that have resulted in tighter monetary policies for investors make consumer credit a lucrative asset class.
Reducing valuations in fixed-income securities and increased risk in options, such as commercial real estate and consumer credit, offer a diversified, high-yielding, and risk-adjusted opportunity for institutional investors while aligning with the dynamic needs of banks.
