The alternative financial services (AFS) industry is a longstanding but growing market capitalizing on evolving regulatory dynamics, favorable underlying secular trends, and increased investor support, leading to strong growth for the sector, according to a Fitch Ratings report.
Increased regulatory oversight has raised the cost of serving the unbanked and underbanked population, prompting many traditional banks to pull back from the AFS market. Fitch expects this trend to continue in the near- to intermediate-term, and for more AFS products and services to shift from banks to nonbank lenders.
Fitch notes that AFS products remain under heightened legal and regulatory scrutiny given their high cost and target demographics, increasing the potential for predatory lending. Although the nature and extent of pending regulatory proposals are uncertain, Fitch expects any changes will likely have an adverse impact on the industry. However, potential new regulation will not eliminate or reduce the needs of the underserved and unbanked population, in Fitch's opinion.
From a credit perspective, AFS lenders face numerous risks that typically limit their ratings to the 'BB' rating category or lower. These risks include limited revenue diversification, elevated credit losses, exposure to changes in commodity prices, high reliance on capital markets funding, acquisition-driven leverage volatility and the substantial regulatory risks.
The full report 'Alternative Financial Services Industry Overview' is available at 'www.fitchratings.com.'
Additional information is available at 'www.fitchratings.com'.
Source: Fitch Ratings
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