Fintech lenders are simultaneously building up and remaking the American unsecured personal loan business. From small beginnings they have come to account for over a third of the personal loan balances in the U.S., according to new figures from TransUnion.
Over the last six years banks have lost 12 percentage points of market share to fintech lenders and credit unions have lost 10 percentage points. Traditional finance companies have lost 11 percentage points of share. Fintech lenders picked up the 33 percentage points, growing from a 5% share of the personal loan market in 2013 to 38% in 2018.
“Consumers have been trained to look online for a fintech lender before they will look for a traditional lender,” says Jason Laky, Senior Vice President and Line of Business Leader at TransUnion, in an interview with The Financial Brand.
Google “personal loan” and most of what you’ll see on the first page will be paid or organic listings for fintech personal lenders like Lending Club, LendingTree, Avant, Marcus (offered by Goldman Sachs), and Rocket Loans, or personal finance sites like Credit Karma, Credit Sesame, and Nerdwallet presenting curated lists of sources of fintech personal loans or the ability to apply once to multiple lenders.
A review of marketing campaigns tracked by Mintel Comperemedia indicates that many unsecured lenders actively send outbound marketing efforts to consumers as well, sometimes directly, sometimes under the auspices of marketing services.
Pie Keeps on Growing, But Size of Slices Are Changing
The relative slices of the personal loan pie are shifting drastically. Just look at the table below, and you’ll see banks’ share of personal loans falling from 40% to 28% over a six-year period. Over the same time frame, credit unions share of the personal loan market was nearly halved — falling from 24% in 2013 to 13% in 2018.
The good news for traditional lenders? The pie itself has been growing larger. Over just the last six years, outstanding balances in unsecured personal loans have increased by 150%, closing 2018 at $138 billion. In the third quarter of 2018, personal loan originations rose by 22%, according to TransUnion records. This made the fourth consecutive quarter of 20%+ annual origination increases.
Over 19 million Americans now have a personal loan, the company found, which is highest level ever observed.
“Fintechs have helped make personal loans a credit product that is recognized as both a convenient and simple way to obtain funding online,” says Laky. “More and more consumers see value in using a personal loan for their credit needs, whether to consolidate debt, finance a home improvement project, or pay for an online purchase.”
Part of what got fintechs off the ground and off to a fast start was the use of alternative credit standards and artificial intelligence to evaluate potential borrowers enabling quick credit decisions. In addition, 24/7 availabilityadded the lure of convenience.
|Size of unsecured
personal loan market
|# of unsecured
|# of consumers with
unsecured personal loans
|Average balance of new
unsecured personal loans
Traditional Lenders Must Join the Fray
Laky says that even banks and credit unions that were reluctant to retool their personal loan operations are doing so now, adopting some of the methods and alternative credit approaches used by fintech lenders.
He says they are seeing the need to offer fintech-like versions of their traditional consumer credit services to remain competitive with fintech lenders. Past research by TransUnion has indicated that fintech personal loan borrowers tend to have a similar profile to bank and credit union borrowers, though fintechs tend to be willing to take greater risks than banks, which stick to prime and above. Credit unions, by contrast, frequently adjust their risk appetite to their membership base, though Laky says that they stick with prime, generally.
“I expect bank and credit union loan growth rates to keep up with what we’ve been seeing from the fintechs,” says Laky. “The industry is catching up with the fintech approach.”
This has been a growth area for banks and credit unions. Laky says a downside is that personal loan accounts tend to get into trouble earlier than other types of credit when the economy falters or there is a turn in the credit cycle. Generally consumers use all of a personal loan at once, unlike an unsecured credit line or a home equity line of credit, where the balance may rise and fall. On the other hand, Laky notes that the impact of any one lender’s credit problems would be contained, somewhat, because unsecured personal lending is a very fragmented business, consisting of many players.
Beyond technological advancements, something that’s helped the personal loan boom along is a friendly regulatory environment, according to Laky, especially in regard to subprime personal lending. The lighter regulatory touch seen at the Consumer Financial Protection Bureau over the last year has helped make more funding available for fintech lenders.
“Investors have been more confident in putting money into subprime and near-prime programs, as well as all personal loan products,” says Laky. TransUnion research has found that fintech lenders tend to apply the most robust risk-based pricing strategies of all personal lenders. They also tend to be more conservative than traditional finance companies, which tend to serve the lower portions of the credit risk spectrum.