Fintech lenders boost growth in unsecured loans

More borrowers are utilizing the rapidly growing fintech lending industry to garner record numbers of unsecured personal loans.  American have “sharply increased their use of unsecured personal loans because of the growing presence of fintech lenders,” according to a new report from the Federal Reserve Bank of St. Louis.

The total of unsecured personal loans leapt to $138 billion by the end of 2018, an increase of $21 billion from the previous year. The total reached $143 billion by the end of the first quarter of this year and is estimated to rise to an all-time high of $156 billion by the end of 2019, according to the Federal Reserve of St. Louis.

Of the $138 billion total at the end of 2018, 38 percent was issued by fintech firms. This is a seven-fold increase from the 5 percent of unsecured personal loans issued by fintech firms in 2013.

“Consumers are attracted to the convenience and speed offered by online lenders” such as LendingClub, Prosper, SoFi and Avant, wrote Eldar Beiseitov in the Federal Reserve of St. Louis report. He added traditional banks have begun to use “fintech innovations to meet changing consumer expectations.”

Many states around the country are using incentives to attract fintech companies and add local tech jobs. A recent example is Arkansas Gov. Hutchison’s participation in the state’s fourth annual fintech accelerator this month inviting the out-of-state participants startups to remain in Arkansas at the conclusion of the 12-week cohort.  

Venture Development Organizations (VDOs) are also investing in fintech – and seeing economic development results in the form of jobs and capital to recirculate into the region. The latest fintech success story for VDOs appears in Philadelphia where Ben Franklin Technology Partners of Southeastern Pennsylvania became one of the exiting early investors resulting from the $600 million purchase of 300-employee Instamed by JP Morgan Chase, finalized on July 24.

Global banking giants like Chase are right to sense a disruption to traditional lending practices. Beiseitov’s report found that the marketing efforts of fintech firms has helped consumers recognize “online lending as a convenient, fast and simple way to obtain a loan.” The application can be completed in minutes, and a decision is usually provided in 24 to 72 hours. More consumers are using fintech personal loans to pay off higher-interest credit cards, consolidate debt or finance home improvements at costs lower than those offered by brick-and-mortar banks, according to Beiseitov’s research.

Subsequently, the growth of the fintech industry has altered the way traditional banks operate.

“Banks, both big and small, have streamlined and enriched their online and mobile offerings in an effort to satisfy consumers’ demands for convenience and speed,” Beiseitov wrote.

There are economic risks, however, to the rapid ascent of loan-based fintechs. These early stage firms need to show growth in use of their products – through increased loan activity, for instance – to attract later stage investors or acquisition.  Collateralized loans are one thing, but an unsecured personal loan is one that is not supported with collateral and is not as dependent on the credit scores banks have traditionally used in the decision-making process. Fintech firms use data analytics, including a potential borrower’s payment and billing history, as well as online shopping habits, to predict the likelihood of repayment.

“The rapid growth in consumer loans sits squarely on the shoulders of fintechs,” said Jason Laky, senior vice president and leader of TransUnion’s consumer lending line of business in a CNBC story.

Laky expressed some concern that in the event of an economic downturn or recession, “subprime borrowers are the ones that … are likely to be at risk of losing their jobs or hours, that creates financial stress. As long as we believe [the] economy is still on solid path of growth, there shouldn’t be an issue.”

A record number of Americans – 19.3 million – had at least one outstanding unsecured personal loan at the end of the first quarter of 2019, according to the Federal Reserve of St. Louis report. This is an increase of more than 2 million from 2017.