Fintech’s Impact on Personal Loans

Personal loan borrowing has been on the rise in the past several years, and fintech (short for financial technology) lending is playing an increasing role, according to a recent Regional Economist article.

Business Economist Eldar Beiseitov noted that both the number and dollar amount of unsecured personal loans (more commonly referred to simply as personal loans) to American consumers has risen over the past couple of years:

• Around 19.3 million consumers had at least one outstanding unsecured personal loan at the end of the first quarter of 2019, up more than 2 million compared with 2017.
• Outstanding loan balances totaled $143 billion by the end of the first quarter of 2019, up $26 billion from 2017.

“In the last two years, the rate of growth in unsecured personal lending has been significantly faster than in other types of consumer credit, including auto, credit card, mortgage and student debt—all of which have climbed, thanks to favorable economic factors,” Beiseitov wrote.

The Increase in Fintech Lending

The author explained that the rise of fintech lending has been a key component of such increases. “Since 2013, much of the growth in personal lending is driven by loans originated by fintech firms,” he wrote.

Beiseitov noted that fintech lenders now originate 38% of unsecured personal loans, up from just 5% in 2013. In fact, fintech’s share now exceeds the shares of banks (28%) and credit unions (21%).

Why Fintech Loans Are Gaining Acceptance

“Today, thanks in no small part to the marketing efforts of fintech firms, consumers recognize online lending as a convenient, fast and simple way to obtain a loan,” Beiseitov wrote.

He noted that loan applications can be completed in a matter of minutes, with decisions taking 24 to 72 hours in most cases. “A qualified consumer typically has access to the funds in less than a week,” he explained.

He also highlighted a study finding evidence that fintech firms tend to deliver lower interest rates compared with rates from credit card companies.Adams, Robert. “Do Marketplace Lending Platforms Offer Lower Rates to Consumers?” FEDS Notes, Board of Governors of the Federal Reserve System, Oct. 22, 2018. “Credit card and other debt consolidation through online lenders can offer real financial benefits to some consumers,” Beiseitov wrote.

Fintech’s Use of Alternative Data

Beiseitov noted that fintech lenders were heavily reliant on FICO scores when assess loan applications about a decade ago. Over time, use of other types of data and improved forecasting models have lessened that reliance. One study found that the correlation between FICO scores and the credit grades given to loans by fintech lender LendingClub had fallen from 80% in 2007 to around 30% in the past two years. Jagtiani, Julapa; and Lemieux, Catharine. “The Roles of Alternative Data and Machine Learning in Fintech Lending: Evidence from the LendingClub Consumer Platform (PDF).” Working Paper 18-15, Federal Reserve Bank of Philadelphia, January 2019.

Instead, fintech lenders use several types of data to assess loan applications, including:

• Payment and billing history, such as cable, utilities, phone, insurance and alimony
• Bank account statements and transaction, such as recurring deposits, cash outflows and payments
• Credit card transactions
• “Breadcrumbs,” such as activity on social and professional networking sites

Alternative Data Issues

Beiseitov noted that fintech lenders—similar to traditional lenders—must still comply with several legal and regulatory requirements, such as the Truth in Lending Act and the Fair Credit Reporting Act.

He also noted concerns voiced by consumer advocates about potential issues with using data obtained from social networks. “Unless carefully managed, certain alternative data can be correlated with protected attributes, such as race and ethnicity, while individuals who choose not to participate on social media sites may be inadvertently discriminated against,” Beiseitov wrote.

Notes and References

¹ Adams, Robert. “Do Marketplace Lending Platforms Offer Lower Rates to Consumers?” FEDS Notes, Board of Governors of the Federal Reserve System, Oct. 22, 2018.

² Jagtiani, Julapa; and Lemieux, Catharine. “The Roles of Alternative Data and Machine Learning in Fintech Lending: Evidence from the LendingClub Consumer Platform (PDF).” Working Paper 18-15, Federal Reserve Bank of Philadelphia, January 2019.

Additional Resources

• Regional Economist: Unsecured Personal Loans Get a Boost from Fintech Lending
• On the Economy: The Basics of Fintech
• On the Economy: Fintech: How Technology Is Changing Consumer and Small Business Lending