Fintech lenders will come back in force as the economy reopens
After roughly three-quarters for creations in 2020 due to the pandemic and resulting consolidation, the fintech lending industry began a big comeback in the last quarter and could jump 20% or more over the next few years.
In a report, S&P Global Market Intelligence analyzed the performance of three key sectors of fintech lending: personal loans, loans to small and medium-sized businesses and student loans. Overall, these companies saw their origins volume plummet by 36%.
“The COVID-19 pandemic has been the biggest shock to the non-bank digital lending industry over the past decade,” the US firm Fintech Market report says.
Much of the fintech lending industry has apparently come through the worst of the pandemic, with the advent of several vaccines that promised a resumption of strong economic activity in addition to unprecedented federal stimulus spending.
What to watch:
Assuming the economy picks up and holds itself together, fintech lenders could become more of a competitive factor than ever before.
S&P Global Market Intelligence predicts that in addition to surviving, fintech loans will increase dramatically, surpassing pre-COVID 2019 levels by 2024. Personal loan fintech lenders are expected to increase 51%, to $ 47.9 billion dollars per year. Fintech lenders to small and medium-sized businesses are expected to rise 16.1% to $ 15.8 billion. And student lenders are expected to rise 152% to $ 32.8 billion. The firm believes that the second wave of PPP loans and the blow to small and medium-sized businesses during the crisis will dampen the demand for business credit that would otherwise have been observed.
This comes at a time when many fintech lenders are transforming.
Loan Club and Square are now banks and SoFi announced its acquisition of a community bank to accelerate its efforts to become more widespread. Upstart, which has the distinction of having a “fintech sandbox” relationship with the Bureau of Consumer Financial Protection, has embarked on auto credit and plans to launch an online lending platform for borrowers. Spanish speakers. SoFi, which started out as a specialist in student loans, added personal and home loans to it, and expanded to other banking products.
COVID trial was ‘point of proof’ for Fintech loan model
The report recounts how lenders have often pulled out in the face of eroding credit conditions. At the same time, many lenders – not so much student loan specialists – have seen demand decline, according to the report. In addition to a slowdown in credit card spending, which often leads to personal loans for debt consolidation with fintechs, more borrowers were avoiding new debt. Government stimulus payments and related spending also offset some of the credit need that might otherwise have been collected.
As fintech lenders as a group have taken an aggressive part in the multiple stages of the paycheck protection program, they have seen demand decline for their standard business loan products.
In 2020, two large commercial fintech lenders were acquired. In October 2020, Enova acquired On Deck Capital, which encountered credit difficulties during the coronavirus crisis. Earlier this year, American Express acquired Kabbage, as a business and with its lending technology – but not its loan book.
“While there was some consolidation, a lot of companies survived and came out on the other side,” says Nimayi Dixit, research analyst at S&P Global Market Intelligence in an interview with The financial brand. “We were already seeing some companies starting to expand their origins again, almost reaching their level of creation in 2019.”
Why traditional lenders should care:
The COVID crisis has been a major economic shock and so far most fintech lenders have resisted it. This suggests that their methods are worth considering.
Dixit points out that some investors had persisted in their belief that fintech lenders had not been economically tested. Many use alternative credit data and typically rely on artificial intelligence to assess borrowers.
For example, in a corporate blog, Prosper explains how ten years of proprietary data, artificial intelligence, and a combination of traditional and alternative underwriting helped him maintain credit quality in 2020. For example, among borrowers who did not join a COVID relief program at Prosper, the delinquency rate of 30 days and more was 44% lower than the levels seen before the pandemic.
The survival and continued return of the majority of these lenders should attract the attention of traditional lenders, investors and regulators.
“If the underwriting models of fintech lenders were really resilient in the face of a major economic cycle” and not traditional, on top of that – “that would be kind of proof that a lot of people were looking for,” says Dixit.
The analyst points out that this would add credibility to the industry with regulators, as more of them will likely pursue bank charters.
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We must pay attention to the origin of the finech money
These developments are also important for fintech lenders as they add more confidence when businesses seek financing. The financing models of fintech lenders vary, but all are based on favorable perception. One main reason why Loan Club Acquisition of Radius Bank, completed in early 2021, was to be able to combine its historical method of financing with the advantage of insured bank deposits.
What to watch:
The impact of Buy Now Pay Later credit on other fintech lenders remains to be seen, but it is an undeniable force in the market.
Dixit says companies and Buy Now, Pay Later programs are part of the growing fintech universe. They were not part of S&P Global’s tracking, as this effort requires a company’s core product to involve at least $ 1,000 in debt. Much of what retail-focused BNPL programs fund is less than that.
“A lot of people think of them as payment companies,” Dixit says, “but from what I’ve seen of their business models, there seems to be an element of credit risk.”
Fintech lenders could face some rough seas
The return of FinTech lenders over the next few years will not be without challenges.
One is competition. New players are coming onto the scene beyond big tech like Amazon that have already nibbled at the edges. Dixit emphasizes Walmart, which partners with Ribbit Capital to develop a fintech, as a credit competitor to watch. And he notes that H&R Block announced its intention during its Investor Day in December 2020 to launch a digital banking effort that would not only include a consumer service, but also target wealth management and underbanked markets. Part of that would build on existing services.
Another challenge is a changing image in Washington. The Trump administration has fostered financial innovation, but the attitudes of the Biden administration are more nuanced and still exposed.
Terminology can become a problem. “’Fintech lender’ is a bit of a loose term,” says Dixit. “We use it for convenience. But that encompasses everything from the LendingClub, which has received approval to merge with a bank, to payday lenders that operate on the Internet. But these are two very different types of businesses. “
Dixit finds it significant that two former fintech associations, the Marketplace Lending Association and the Online Lending Policy Institute, announced their merger, to form the American Fintech Council, in March 2021. It is clear, he says, that they think that it is time to strengthen Washington representation.