Study of online lenders points to wider-than-perceived scope of clients and loan offerings
Because they offer a specialized service, fintech lending platforms are assumed to serve a niche client base. But according to a new study from TransUnion, they may be causing a much bigger shift in Canada’s borrowing space.
“The explosive growth of the FinTech industry has already had a significant disruptive impact on the traditional consumer lending landscape, and has fueled a race for digital capability amongst banks and FinTechs,” said Matt Fabian, director of financial services research and consulting for TransUnion Canada of Canada, Inc.
TransUnion analyzed more than 21 million non-mortgage credit products originated in Canada from Q1 2017 to Q2 2018. It defined fintech lenders as those that enable, support, or improve banking and financial services using advanced computer algorithms or other technology as their primary platform, without an established physical network of branches or stores.
According to the study, fintech borrowers go beyond millennials and Gen Z consumers, who are widely regarded as digital natives. Nearly half (46%) of Canada’s fintech consumers are more than 40 years old, compared to 53% of consumers with personal loans from traditional banks.
And contrary to some assertions that fintech lenders largely cater to the unbanked or underbanked, the study found that more than half of fintech consumers (51%) have availed of at least three credit products offered by traditional institutions — including credit cards, lines of credit, installment loans, and home loans — by the time they originate a fintech personal loan.
“It is apparent that FinTechs attract Canadian consumers across different ages and levels of credit experience by providing a differentiated, seamless consumer experience,” Fabian said, noting “competitive challenges and opportunities for increased partnerships between traditional banks and FinTech firms.”
While online lenders are commonly perceived to focus on short-term loans with durations of less than 12 months, the study found that 88% of fintech-issued personal loans have terms longer than 12 months, compared to 68% for the bank-issued equivalents. Banks were also found to issue a higher percentage of personal loans with terms of 12 months or less (32% vs. 12% for fintechs).
At the same time, the study found a greater tendency for fintech lenders to serve high-risk consumers. Over the study period, TransUnion found 65% of fintech installment loans being originated to consumers in the subprime segment, as opposed to traditional banks and lenders where more than half of personal loan issuances went to borrowers with prime or better risk scores.
Delinquency rates were also higher across all risk tiers served by fintechs, which compensate by charging generally higher interest rates on personal loans. As an example, within the subprime segment, fintech lenders saw average delinquency rates that were anywhere from 100 to 500 basis points higher than traditional banks and lenders; however, the fintechs priced for that risk with interest rates between 20% and 30% within that category.
“The ability to be agile, potentially with lower overhead compared to more traditional lenders, may enable FinTechs to operate in higher-risk segments and carry higher delinquencies,” Fabian said. “But it is still critical to have a strong credit risk framework, and a detailed understanding of portfolio risk.”