Since 2008, both traditional lenders like banks and credit unions and high-tech lenders have grown the personal lending space by 45%. Traditional lenders have grown by 31% in the last 2 years. With corporate demand for new funds tepid, consumer lending has been the major source of growth for lenders. This indicates that though Fintech is capturing a larger market share traditional lenders have been able to hold on to their turf and are growing along with the market. The growth in consumer lending has been driven by resurgence in the loan category and aggressive posturing by bank finance companies and credit unions.
The consumer lending space was worth $178.8 bil in 2013 and has grown to $226.73 bil in 2014 and $259.73 bil in 2015. According to the “Alternative Finance Benchmarking Report” (published by Cambridge University in collaboration with Chicago University), alternative consumer finance lending has grown from $2.90bil in 2013 to $8.33 bil in 2014 and $28.83 bil in 2015.
A segment which accounted for only 1.62% of the traditional market in 2013 now has a 11.09% share. It amounts to a growth of almost 261% per year in market share, for a total of more than 1000% growth in absolute dollars in a span of just two years. Peer to peer lending has truly entered the mainstream in the United States.
Secured vs unsecured
The core growth in personal loans has taken place in the unsecured space with very little change in the secured personal loans space.
Shift from subprime to near prime
The adoption of alternative lending has been the highest in the near prime and prime segment (600-720). The personal loan originators have shifted aggressively from subprime to this segment, with subprime accounting for 43% of total loans in the third quarter of 2010 and just 33% in Quarter 3 of 2015.
In fact, according to a report released by Transunion, the 600-720 band now accounts for more than half of personal loan originations. Over 92 million of credit active Americans fall in this sub-category and the number of lenders serving this category has increased from 22 in 2010 to 57 lenders in 2015.
However the personal loan penetration in this largest category ( 621-640 Vantage Score) is still less than 12% in the particular segment and around 5% across the spectrum. In comparison credit card penetration in their largest credit score segment is 61%. In other words, 12% of people in the VantageScore 621-640 have a revolving balance with a personal loan while 61% of people have a credit card with a monthly balance in that market segment. This highlights that despite the number of lenders and their size the market is not anywhere near saturation.
Personal loans vs credit cards
Almost 61% of the population has a credit card versus only 5% have a personal loan. First, credit cards are often sold at a point-of-sales which have very large coverage. Second, patrons view credit cards not as a loan but more as a payment method. And third, while people will apply for a loan with when a specific need rises, people will put in place credit cards because it gives the holder flexibility to utilize his limit according to his exact requirements if and when he or she wants to. To further highlight the preference of credit cards over other personal loan products credit card debt is around $733 bil versus the $260 bil consumer debt in America.
Moving from personal loans to credit cards
Competition in the personal lending space caused some lenders to take on more risk in order to grow resulting in growing delinquencies.
Instead on competing on price other companies have started looking at the credit card space.
Startups like Affirm, Klarna, Bread, Prima Health credit, AutoFi, Earnest etc are targeting point of sales financing aggressively but are still in their infancy in terms of partnerships with merchants, cash backs and other offers extended by credit card companies. Though they are as convenient as using credit cards, the flexibility to use in brick and mortar shops is still lacking. The slow evolution in Fintech to target the credit card industry can be attributed to the business model of the early p2p companies. The lenders in the p2p companies were individuals who required a structured payoff of their loan via an EMI structure, whereas giving a limit to the borrower entails the uncertainty of how much the user would utilize his limit and when will he be paying off the principal. With p2p evolving to “marketplace” lending, with the arrival of hedge funds, insurance companies, and even banks to the mix as lenders, this uncertainty is palatable to sophisticated financial institutions due to the risk being spread over a large number of borrowers.
Over 80% of Lending Club loans are used for credit card debt payoffs, but still the convenience of using a card has made it the status quo for purchasing. Fintech startups have raised giant funding rounds to target this segment. Affirm has raised $420 mils in 3 rounds and Europe based Klarna has raised $291.33 mil. Even established behemoths like PayPal and Amazon are launching or have launched their point of sales credit solutions. At play is the entire payments industry which has been the supporting infrastructure of e-commerce all along. The POS financing companies have started offering the same freebies as credit card companies; promoting cash back offers and exclusive discounts by partnering with merchants and charging them a commission in return for driving the credit-fueled sales.
Customer acquisitions and repeat business
When is the last time you changed credit card companies ? When is the last time you took a 2nd loan from the same institution ?
Many companies have noticed that personal lending customers are extremely un-loyal and will purchase based on price alone. This is a huge problem in an environment where customer acquisition costs are growing and are the main expense. Products like credit cards and lines of credit will generate repeat customer business, will turn the fintech platforms into actual finance platforms as they capture more and more customer engagement which will allow fintech to launch new products. And last but not least repeat customer business and increase loyalty will amortize the cost of customer acquisition across a much larger lifetime customer value.
Author: George Popescu