FinTech lending on the rise

Digital LoanThere was a time when applying for a loan meant sitting on a hard, wooden chair across the desk from a stern-faced banker, nervously clutching your derby, kneading the brim with your fists, and trying to look like a good risk.

Not much has changed except for, well, all of the above. You can apply for a loan perched comfortably in your living room. Digital data, not your appearance, establish your ability to repay. And, really, does anyone wear a derby anymore?

And in the world of digital lending, FinTech is making its mark. The latest numbers from Transunion suggest that an increasing number of borrowers are bypassing traditional financial institutions and going straight to FinTech:

The FinTech revolution has propelled unsecured personal loans to another record-breaking quarter … personal loan balances increased $21 billion in the last year to close 2018 at a record high of $138 billion. Much of this growth was driven by online loans originated by FinTechs.

FinTech loans now comprise 38% of all unsecured personal loan balances, the largest market share compared to banks, credit unions and traditional finance companies. Five years ago, FinTechs accounted for just 5% of outstanding balances. As a result of FinTech entry to the market, bank balance share decreased to 28% from 40% in 2013, while credit union share has declined from 31% to 21% during this time.

The rapid rise of FinTech lending shouldn’t surprise. Data is their business, and data drive lending and approvals. The very nature of FinTechs allows for unprecedented nimbleness. As finance reporter John Detrixhe, writing for Quartz, notes:

Fintechs have reinvented personal loans. Their digital platforms can quickly analyze and make a decision on whether to lend money. The lack of collateral means less paperwork, which speeds up the borrowing process. 

Transunion blogger John Wirth puts it more bluntly:

FinTechs are unencumbered by legacy technology systems, more conservative corporate cultures and the layers of approvals that can be present in traditional lending organizations. FinTech lenders’ ability to start from scratch and make quick decisions enables rapid iteration, refinement and aggressive adoption of the latest solutions.

Yet the “traditional” in “traditional lending organizations” is an unfairly loaded term. To be sure, some “traditional” banks exhibit sluggishness when it comes to adapting to the digital world. But the likes of Wells, Citi, Bank of America, Chase, and Capital One have shown themselves to be blazingly fast in seizing and running with the digital ball. 

One could equally argue that “traditional” banks bring everything to the party that FinTechs bring plus a few things that FinTechs cannot, such as physical facilities and face-to-face meetings. Such features are not de facto encumbrances, and they still matter to clients. Writing for Consumerist, Kate Cox reported that small business owners still seem to like visiting the bank in person:

Sure, a trendy new salon or boutique might operate almost entirely off an iPad in the front running Square, but there are still plenty of small businesses that need to deposit cash or make change runs frequently. The proprietors of those small businesses may also want to negotiate business loans or talk money matters face-to-face.

“Proximity to their business is a very, very important factor to their bank selection and their continuing relationship with a bank,” a U.S. Bancorp executive told Reuters.

Moreover, CNBC’s Kate Rooney raised a note of concern concerning the volume of unsecured loans figuring in the growing Fintech portfolio:

Fintech firms like SoFi, LendingClub, Prosper, Avant and GreenSky offer digital or mobile-first options that often use data points aside from FICO scores when assessing creditworthiness. Square and PayPal use similar metrics. But they tend to reach further down the credit curve, raising questions about how many would fare in their first-ever economic downturn. In 2018, most of the growth was at the lower end of the risk spectrum.

Nor did remarks by Transunion’s Jason Laky, senior vice president, consumer lending business leader, reassure in his remarks quoted by CNBC: 

“Subprime borrowers are the ones that, if the economy turns and growth slows, are likely to be at risk of losing their jobs or hours, that creates financial stress,” Laky said. “As long as we believe [the] economy is still on solid path of growth, there shouldn’t be an issue.”

Wirth would parry concerns by pointing out that finance companies’ portfolios are even riskier:

… when we compared the FinTechs’ risk appetite to other lenders, FinTechs were actually somewhere in the middle. FinTechs are more conservative than traditional finance companies, but have a higher risk appetite than banks.  

Wirth’s argument indulges the Privation Fallacy, the notion that if you’re in a wheelchair when you could be in a body cast, you have nothing to complain about. Whose portfolio is riskiest isn’t the issue. The issue is whether FinTechs operate with an acceptable level of risk. 

It may be premature to dismiss “traditional” financial institutions as too stodgy, and likewise premature to dismiss emergent models as too reckless. As tends to happen in market economies, the best finance companies, FinTechs, and “traditional” financial institutions will likely borrow one another’s strengths, in time blurring the distinctions.

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