How do you define a market? It's a timeworn question, which dates back at least to the trust-busting days of Teddy Roosevelt, but one that's freshly relevant in the digital economy.
Take, for example, the pending sale of Citigroup's OneMain Financial unit to Springleaf Holdings. OneMain and Springleaf are the two largest subprime consumer installment lenders in the country, with a combined 2.5 million customers spread across 43 states.
Officials at the Justice Department and in state Attorney General offices have raised antitrust concerns about the proposed $4.25 billion sale, which was originally supposed to close by Sept. 30, but has been delayed amid the governmental scrutiny.
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The Justice Department's primary worry appears to be that the combined company will close branches in towns where the two firms currently compete head-to-head, leaving local consumers with fewer storefront options. But the antitrust review comes at a time when, thanks to the Internet, subprime consumers have arguably never had more options for installment loans. Borrowers who visit Lending Tree, the comparison-shopping site, can choose among more than 20 different personal loan products, many of them targeted at folks with marred credit.
Even Springleaf, which closes most of its loans in its stores, says that 70% of its new customer applications start on a digital device. The migration online suggests that the Justice Department may be fighting the last war.
"The argument is really whether competition comes in at the local level or at the national level," said Michael Tarkan, an analyst Compass Point Research & Trading. "I think there's an argument to be made on both sides."
The list of places where OneMain operate includes off-the-beaten-path communities like Poplar Bluff, Mo. and Lufkin, Texas. Following the acquisition, Springleaf expects to close about 200 branches.
The two firms' loans are generally more expensive than mainstream credit cards, but cheaper than payday loans. Their customers often have credit scores in the low 600s, which places them in the 20th to 30th percentile of the U.S. population.
That demographic has no shortage of other options these days, however, as venture capitalists, in search of the next big fintech company, have poured money into the consumer-lending sector.
Hedge funds and other institutional investors are also helping to fuel the proliferation of online lenders. Seeking higher returns than they can get from the prime loans offered by the likes of Lending Club and Prosper Marketplace, these investors are eagerly purchasing loans from new competitors that are reaching further down the credit spectrum.
"I see marketplace lenders expanding their target market," said Nick Clements, co-founder of the comparison-shopping site MagnifyMoney.
Most prominent among this new breed of subprime lender is Chicago-based Avant, which has made more than $1.5 billion worth of loans since 2012, and recently announced a $325 million equity financing round. Avant offers two- to five-year personal loans ranging from $1,000 to $35,000, and at annual percentage rates ranging from 9.95% to 36%.
A newer entrant, Applied Data Finance, is offering one- to three-year loans of between $1,000 and $10,000. The loans, sold through the Personify Financial brand, have an average annual percentage rate of around 32% or 33%, according to Chief Executive Krishna Gopinathan. Annual interest rates max out at 100%, the firm's website states.
Gopinathan said he is confident that he can attract the capital to grow his business quickly. "We're offering particularly juicy returns" to investors, he boasted.
These alternative lenders argue that they have found smart new ways to underwrite subprime consumer loans, but some observers are questioning how well their models will hold up when the U.S. economy goes south, and whether they will tarnish online lenders that focus on more creditworthy borrowers.
"If you start to get irresponsible competitors, that starts to ruin the industry for everyone, right?" said Julianna Balicka, an analyst at Keefe, Bruyette & Woods.
Meanwhile, the better established subprime lenders are migrating online in a quest to fend off the new competition. Evansville, Ind.-based Springleaf and Citi's OneMain unit have started to compete for customer leads online, though applicants generally head to their brick-and-mortar stores to complete the process.
Over time that may change. Springleaf recently launched iLoan, an online platform that allows consumers to apply for a personal loan of as much as $25,000.
Alex Johnson, an analyst at Mercator Advisory Group, expects this convergence between storefront lenders and Web-based upstarts to continue, since consumers increasingly want an online experience. "It's more convenient, it's a little bit more straightforward, it's faster," he said.
The intensifying Internet-based competition could prove beneficial for Springleaf as it seeks approval of its purchase of OneMain. The acquiring company can argue that, from the standpoint of antitrust law, the market includes online-only lenders.
"What the Internet allows you to do is not just apply at Springleaf, but potentially apply at more than one place," Springleaf CEO Jay Levine said during an Aug. 6 conference call. "You may not want to walk into every branch in the community, so you get online and go to a few places."
Still, just because consumers have lots of choices online does not mean their applications will get approved. Nor does it mean that they will find good options.
The terms of personal loans available on the web vary tremendously. Borrowers with high incomes and strong credit scores may qualify for loans from Social Finance Inc., which carry a maximum APR of 9.99%. Further down the credit spectrum are loans from the likes of Lending Club. Then there are the firms, including Avant, that compete most directly with Springleaf and OneMain.
Finally, there are online installment lenders that offer credit at rates as high as payday lenders. LoanNow, based in Santa Ana, Calif., markets loans with APRs from 29% to 299%, depending on the borrower's home state.
Which of these online companies are competitors of Springleaf? It is hard to say.
Most observers are anticipating that the acquisition of OneMain will get approved. That list includes Citi Chief Financial Officer John Gerspach, who said during the firm's earnings call Thursday that he expects the sale to close during the fourth quarter.
But while the subprime personal loan market is shifting online, the Justice Department may be more concerned about maintaining options in communities from coast to coast.
"They're going to be focused on specific geographic locations where those two companies compete," said Jennifer Hackett, an antitrust lawyer at Dickstein Shapiro.
In a research note, analysts at Compass Point wrote that Springleaf may need to make concessions to the Justice Department in places where both firms operate.
"Given the concentrated branch overlap, this could result in targeted forced sales for Springleaf," the note stated.