The personal loan market is booming thanks in part to low unemployment, favorable regulation and a crop of fintech lenders.
But whether or not this type of lending is resilient in the face of rising interest rates and the potential for a future downturn in employment, remains to be seen, injecting risk into the economies in the developed countries where this type of lending has exploded.
That’s the assessment of the Bank of International Settlements, which in a report last month warned the fintech lending market is still unproven. “It is not clear how fintech credit will perform when conditions deteriorate, ” wrote BIS in the research report. It pointed to China, the U.S., and the UK where higher default rates for the fintech lenders have reduced investor returns. BIS said a “significant” share of the fintech lending platforms cite increased levels of defaults as a very high or high risk to operations.
It doesn’t help that the higher fintech credit default rates are happening at a time when non-performing loan rates at traditional banks are historically low. That suggests the fintech lenders, in an effort to expand, are providing loans to borrowers that are deemed riskier by the traditional banks. That’s fine when interest rates remain low and unemployment is near historical levels. But if interest rates continue to march higher, and the job market has a downturn, lots of consumers could be staring at personal loans bills they can’t pay back. For countries with higher incomes and less competitive banking systems, the potential impact could be more profound. BIS found fintech lending is robust in those markets. The volume of fintech loans is also higher in countries that don’t have stringent banking laws.
Unsecured Personal Loans Are Booming
Thanks in part to the growth of lending fintechs, the popularity of unsecured personal loans has been surging over the past few years. Take the first quarter of 2018 as one example. According to TransUnion, the credit-scoring company, the number of outstanding personal loans in the first three months of the year rose to 19.2 million. That compares to 16.9 million a year ago. Meanwhile, the total loan balances reached $120 billion, up from $102 billion in the first quarter of 2017. Good news for the fintech lending industry and investors: default rates among personal loan borrowers declined by 3.51% in the first quarter of this year compared to a rate of 3.72% in the same period last year. The strong performance of the loans so far has emboldened lenders, with more fintechs entering the fray.
Increased Regulation Likely
While BIS called out the unproven nature of fintech lending as a risk, it also noted that increased regulation should be coming down the pike and could dampen returns. It pointed to China’s fintech lending market, which has been slowing down in recent months due to a crackdown on the part of the government, as an example. It came too late for the countless investors who lost their money in unregulated peer-to-peer lenders. Then there is LendingClub in the U.S. Just this week its founder and former chief executive officer Renaud Laplanche agreed to pay $200,000 to the Securities and Exchange Commission to settle a lawsuit in which the government agency contends he directed an outside investment firm he was president of to purchase LendingClub loans that were at risk of not getting funded. While that has nothing to do with the fintech lending industry at large it did shake investors conference in the market.
The way BIS sees it the exploding market of fintech loans provides regulators with opportunities and challenges. On the one hand, there are a lot of benefits for consumers with the increased access to personal loans. It gives consumers more choice, greater convenience, lower transaction costs, better credit risk assessments and could aid in expanding financial inclusion around the world. On the flip side, if not handled correctly, consumers and investors could be at risk and if the market grows more, may prompt questions about financial stability in the sector. “Fintech credit has in some cases helped improve credit access for financially underserved firms and individuals while providing additional options to investors. Yet rising credit losses in some jurisdictions suggest that these innovations need to be further tested over a full financial and economic cycle,” BIS wrote.