How direct lending and securitization can disrupt consumer lending in the Nordics

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[Editor’s note: This is a white paper from Brocc. Brocc is a bronze sponsor at LendIt Fintech Europe 2018, which will take place on November 19-20, 2018 in London.]

The consumer credit market in Sweden is a relatively large and growing market. The total loan volumes amount to approximately Bn EUR 23, distributed among 1.4 million individuals. According to the Swedish central bank, the average interest rate is 12.5% ​​and credit losses are between 0.9% to 1.5% per annum.

The funding predominantly comes from Swedish banks and niche banks which are advanced in digitization and benefit from the Swedish population being used to managing their finances online. However, digitization has not contributed to improving competition or the conditions for consumers. Instead, net interest rates (rates after deduction of funding costs) have risen well beyond 8-10% and created the world’s most profitable banks with a return on equity often well above 30%.

This situation opens for other, more efficient lenders to take part in the market. Marketplace lending has existed since 2015 as a phenomenon but has so far only taken about 0.5% of the market. One reason for this is that Swedish institutions and asset managers have been slow to enter the market as they often require listed securities to invest.

To overcome this, Brocc has developed a new innovative securitization solution. By issuing and listing bonds, backed by consumer loans straight to i investors without investment banks, Brocc can cut 80 % of the costs normally associated to such transactions. Hence, the investor is able to obtain the full potential of the yield that the underlying consumer loans generate. Over time the yield might exceed the yield of conventional Swedish consumer ABS by almost the double.

Brocc’s mission is to cut out the middleman and transfer value from banks back to the users. Issuing bonds without intermediaries is a natural step in that direction.

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