In just six years, the personal loan market share of financial technology (fintech) startups jumped from 5% in 2013 to 38% in 2018, which was good enough to end the reign of traditional financial institutions in the United States.
During this period, banks lost 12% of market share, credit unions saw 10% of theirs disappear, and finance companies suffered an 11% reduction. What is more interesting was that traditional financial institutions witnessed their slices shrink while the size of the pie grew.
Here’s why fintechs now rule the personal loan market:
They use data from Salt Lake City title loans and other financial products from other parts of the country that usually go unreported when qualifying borrowers. As many individuals lack extensive credit history, the use of alternative data allows fintechs to see the full picture of a consumer.
In addition to underappreciated financial data, tech firms go extreme lengths to pull transactional and rental pieces of information to understand the likelihood of a borrower to default.
The crazy part is that big data has been available for a long time, and yet mainstream lenders tend to rely on credit bureau reports. The technology has been there, but the effort on the part of traditional financial institutions was lacking.
Fintechs are good not just at capitalizing on big data and analytics, but also at innovation. Tech companies develop platforms for peer-to-peer lending, which empowers average individuals to become lenders themselves minus the hassles that come with it.
Suddenly, there is a new source of unsecured loan. P2P lending platforms are usually accessible through apps, so both parties can easily engage and seal deals.
Some of the usual businesses that automatically go to banks, credit unions, and finance companies are now distributed to P2P lenders. Average individuals, of course, cannot match the resources of major-league lenders since the presence of P2P platforms is enough to put a dent in the popularity of typical personal loans.
Ease of borrowing is another win for fintechs. Tech companies automate the process and eliminate cumbersome steps that inconvenience ordinary borrowers. The efficiency of fintechs makes it possible to approve loan applications in no time and release the funds in less than a day.
In contrary, banks and credit unions may need days, weeks, or even months to approve or reject loan requests. The pain of dealing with a tedious process has always been discouraging to borrowers. The only difference now is that there is a much faster and more convenient way to borrow money.
Tech companies usually operate exclusively on the Internet, allowing them to avoid expenses, such as rent and personnel salary, that their brick-and-mortar counterparts have to contend with. As a result, they are in a position to pass on the savings to borrowers by offering perks and competitive interest rates.
Fintechs have yet to overtake the secured loan market, but they may never have. With collaboration, tech companies and traditional lenders do not have to cannibalize and work together instead to create a win-win situation for everybody, especially for customers.