Online lending is waking up to the opportunity digital underwriting provides to compliment existing lending products. With recent highly publicized irregularities in lending and reporting at Lending Club and stiffer competition in this space, online lenders are finding that historic participants in these platforms have cold feet and business is tough. Insurance products provide a method for online lenders to make money while responding to competition in their core markets. At the same time, demographics are shifting ownership of small business to a younger age group, which is more likely to look online for insurance products. As a result, there is a greater need than ever for insurance products for online lending platforms.
Risk mitigation is a critical component of success and survival for small business, with only about half of all US businesses surviving the first five years of operation based on statistics published by the Small Business Administration (SBA). Now more than ever, as the US enters the last phase of a presidential election, Europe undergoes the fallout of Brexit and possible contagion, and uncertainty continues in other regions, insurance, particularly trade credit insurance, becomes more vital to the continuing operations of small business. Online lenders are well positioned to respond quickly to this need, with the ability to easily integrate online insurance offerings to their existing platforms. We are beginning to see online lending platforms and small businesses connect to insurance platforms to address overall uncertainty in the economy.
Not surprisingly many powerhouse fintech startups are looking to insurance to round out their financial service portfolios, including SoFi, perhaps the best-known fintech disrupter, Number26, the German neobank, Branch International, the Andreesen Horowitz-backed mobile lending startup, and WeLab, a Chinese mobile lending and credit analytics platform. Each of these firms has announced plans to add insurance to its portfolio or to invest in insurance as a promising growth area according to CB Insights.
Even as economic uncertainty fades, which is unlikely, or simply becomes status quo, the number of US small businesses will continue to grow, particularly those owned by Millennials who routinely look online for business solutions. It is estimated that by 2020, Millenials and Gen-Xers will own more than 60% of US SMB according to a study completed by Morgan Stanley and BCG. Not only will ownership of SMBs shift to a younger generation, but the value of digitally underwritten insurance is also expected to grow from $4B to as much as $33B by 2020. This combination of more SMBs and a shift to digital underwriting makes the combination of online lending and insurance coverage a natural partnership.
In order to succeed with an expanded product offering of digital insurance, online lenders will need to learn to think like financial services firms and stretch their self image from functioning solely as tech companies. Just as successful online lending platforms have expanded their depth of bench to respond to volatile credit cycles and other components of the financial services sector, the same will be required for the detailed and highly regulated world of insurance. This combination of digital underwriting and online lending may provide the breath of fresh air needed to invigorate the beleaguered online lending space as well as reach the rapidly expanding market for small business insurance.