Fintech is behind the personal loan boom and banks should take note

TransUnion says The “key driver” of this rapid growth is lending from emerging fintechs, which accounted for over a third (38%) of all personal loan originations, a huge jump from five years ago when they accounted for 5%.

That fintechs have conquered so much of the consumer credit market is not surprising. After the Great Recession, many of the established financial institutions that used to be the first port of call for many consumers when they needed credit, such as B. large banks, the granting of consumer credit.

This created an opportunity for nimble and forward-thinking upstarts have used a combination of technological innovation, flexible underwriting models, sophisticated and efficient web and mobile-based customer experiences, and clever customer acquisition strategies to not only fill the gap, but widen it
Consumer Credit Market.

Fintech lenders come in many shapes and sizes, with different companies often targeting specific types of consumers or categories of purchases.

SoFi, for example, offers personal loans to borrowers it believes are financially responsible and incorporates non-traditional factors such as educational background and work history into its underwriting model.

Another fintech lender, Affirm, is working with retailers to offer their customers the ability to pay for purchases over time. Upon checkout, target customers are offered the option of applying for a perpetual loan to fund their purchase as part of the checkout process. Affirm claims to approve 34% more applicants than its competitors and helps partners increase conversions by 20% and average order value by 87%.

large financial institutions, like Goldman Sachsuse similar approaches to build new consumer credit businesses of their own.

Although they approach the consumer credit market in different ways and often target different types of borrowers, almost all fintech lenders share common characteristics, including all-digital application processes that minimize borrower workload and enable instant or near-instant decisions.

More growth on deck

Fintech lenders are clearly firing on all cylinders and there is every reason to believe that they will continue to increase their share of the consumer credit market and be a driving force behind the expansion of the market as a whole.

Special bank charters for upstarts and a push for a nationwide system to regulate consumer lending could make it even easier for fintechs to grow their businesses. During Battles are brewing Above the trend towards simplified regulation, the momentum seems to be on the part of the fintechs.

That doesn’t mean, however, that concerns about this new breed of consumer credit are unfounded.

A number of companies have already run into trouble with regulators. SoFi, for example, last year settled with the Federal Trade Commission (FTC) over charges that made false claims about the savings consumers could make by refinancing student loans.

Of greater concern for the fintech space than issues with marketing practices is the possibility that fintech lenders are not as solidly positioned as they might seem.

The vast majority of these lenders were established after the Great Recession and therefore only existed during a period of economic recovery and growth. While it can be argued that banks have been stingy with consumer credit over the past decade, it’s also possible that at least some have been
Fintech newbies are not cautious enough and these risks are being masked by a robust economy.

But what happens when fintech loan portfolios are tested by an economic slowdown or financial crisis?? Will we learn that at least part of the success of fintech lenders in lending has been due to a willingness to lend to riskier borrower pools, and not only superior products and customer experiences?

Here, the case of Wonga’s demise in the UK could be revealing. While Wonga, as a payday lender, has faced regulatory risks that most fintech lenders don’t have, the impact of an economic downturn could be just as problematic, if not more problematic.

We will see. But even if that turns out to be the case, banks shouldn’t dismiss what fintech lenders have done to the market. The way they approach their relationships with customers and have created digital-first experiences to serve them matters, regardless of the strength of the underwriting models used to approve or deny loan applications.

And as some fintech lenders increasingly seek to expand their footprint into other financial services offerings, banks should remember that a loan isn’t always just a loan — it can also be the foundation on which a broader long-term customer relationship can be built.

For more information on Econsultancy’s research, training and best practice solutions, contact us at [email protected]

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