Over the last five years, online personal loans from lenders known as financial technology, or “Fintech”, lenders have garnered much attention. Fintechs rapid growth has taken marketshare from traditional lending sources, such as banks and credit unions. This blog will attempt to answer why this is happening.
Methods of Paying-Over-Time
Up until recently, there have been three primary ways consumers have borrowed money to pay over time for large purchases: (1) credit card; (2) in-store financing; and (3) personal loan from your bank/credit union.
First, most, if not all, merchants accept credit cards. But, many consumers either don’t have room on their card or choose to leave the available credit for an emergency. Second, many larger merchants offer in-store financing programs, either by third party lenders or by itself. But, many small businesses don’t have access to or can afford financing programs. Therefore, a third option is to try your local bank. The problem with this approach is you must have very good credit to get a loan with your bank, not to mention that the merchant doesn’t want to see you leaving the store to go find a loan.
Enter the Fintechs!
Fintech lenders don’t have brick-and-mortar locations. Rather, they offer their lending products only online. This not only makes it more convenient for consumers but, it also enables the Fintechs to offer products at lower cost and lend to less-than-prime credit consumers. Convenience, lower cost, and approving less-than-prime credit consumers explains how popular Fintechs have become.
Fortune recently published a good article on the growth of U.S. personal loan debt. While consumers have recently increased their debt loads somewhat, they have also secured more jobs and at better wages. Default rates still remain in the “normal” range. The real story is not the amount of debt, but rather the shift of lending from traditional sources to online personal loans products offered by Fintechs.
Being personally involved in two Fintechs, I see first hand how Fintechs innovate and continue to create products that benefit consumers. A large traditional bank, SunTrust, saw the writing on the wall and took action, launching the online personal loan business, LightStream, several years ago. The result has been a resounding success. I would be surprised not to see more follow that approach.
Looks like Fintechs are here to stay!
~ David Weyher