08 October 2025
The consumer lending market is undergoing a structural shift. What was once a mainstream banking activity is rapidly being recast as a core pillar of the alternative credit universe. In “Alternative Credit: The Rise of Consumer Lending”, Patrizia Lando and Alfonso Ricciardelli map this transformation — from the rise of online platforms to evolving securitization structures and risk management challenges.
From traditional loans to digital access
Lando and Ricciardelli begin by setting the scene: consumer loans span both property‑backed (mortgages) and non‑property-backed forms (personal, auto, student, credit cards). What’s changed is the scale, speed, and underwriting methodologies.
Online platforms now use alternative data (e.g. utility payments, bank transactions, digital behavior) to assess creditworthiness. This expands access to borrowers previously underserved by conventional credit scoring — but it also introduces uncertainty because these models have limited historical performance in stressed macro environments.
Securitization: Turning Loans Into Investable Instruments
To convert consumer loans into tradable credit assets, securitization plays a pivotal role. Loans are pooled, transferred into special purpose vehicles (SPVs), and issued as asset‑backed securities (ABS) with tranche hierarchies and structural protections such as overcollateralization, excess spread, subordination, and triggers.
The report explores how these structures distribute risk: senior tranches aim for stability; mezzanine ones offer yield; and junior/equity pieces absorb early losses.
Key performance drivers & risk factors
Consumer ABS success depends on a few critical levers:
-
Credit Quality / Borrower Profiles — Distinguishing prime, near-prime, and subprime borrowers is foundational. Lower credit quality means higher default risk, especially for unsecured pools.
-
Prepayment & Interest Rate Risk — Falling rates can accelerate prepayments, reducing yield exposure; rising rates can stress borrowers.
-
Counterparty & Servicer Risk — Failures or operational lapses by originators or servicers can disrupt cash flows.
-
Liquidity Risk — The consumer ABS market is smaller than many corporate or sovereign markets, which may widen bid-ask spreads or limit trading during stress.
The authors also discuss structural mitigations: maintaining reserve accounts, embedding triggers, enforcing legal isolation of assets, and requiring strong due diligence on counterparties.
Subasset classes & market trends
Not all consumer lending is the same. The report reviews how auto-backed ABS, credit card ABS, student loan ABS, and niche products like buy-now-pay-later (BNPL) differ in risk/return profiles.
For instance, auto ABS benefit from tangible collateral, which cushions losses to some degree. In contrast, unsecured personal or credit card loans carry higher default sensitivity.
Issuance trends are telling: in the U.S., auto securitizations remain dominant, though unsecured and emerging forms like BNPL are gaining traction. In Europe, consumer ABS markets are smaller, but issuance in unsecured consumer loans recently reached record levels.
Why this matters for investors
Lando and Ricciardelli argue that consumer lending now offers attractive features in diversified credit portfolios:
-
Low correlation to public credit markets - opening means for diversification.
-
Stable cash flows (depending on structure and seniority) if underwriting and servicing are solid.
-
Growth potential: among alternative credit segments, consumer lending is one of the fastest-growing.
Yet, the report cautions that weaker underwriting, model risk, and macro stress can amplify losses in consumer ABS. As credit becomes more democratized, governance, transparency, and investor discipline become essential.
Takeaways for CFA Society Italy Members
For Italian - and, more broadly, European - investment professionals, the consumer credit wave presents both opportunity and challenge:
-
Look critically at the originator’s underwriting practices, especially in fintech lending platforms leveraging alternative data.
-
Stress test for macroeconomic shocks, particularly on unsecured pools, and simulate high default scenarios.
-
Scrutinize structural protections (reserves, triggers, subordination) and servicer arrangements.
-
Monitor market liquidity - even if improved, ABS trading conditions may deteriorate in stress.
Consumer credit is no longer a backwater of finance. The rise of digital lending, backed by rigorous structuring and active risk oversight, is repositioning it as a strategic component of alternative credit. For those willing to navigate complexity, the potential rewards may be meaningful.