Announcements in the financial services market continue to surface with banks and non-banks creating new revenue by delivering convenient access to appealing credit for consumers. Just the other week, U.S. Bank, a division of Bancorp USB, announced that they are entering the business with Simple Loan. More and more traditional banks are offering small loans - through a variety of locations and marketplaces – to Americans in need of cash for planned and unplanned purposes.
The answer to fast cash for many people in recent years has been payday lenders, and more recently, eCommerce companies have begun to provide financing options powered by fintech. Consumers consider the pros and cons of establishing new financial relationships based on the competitiveness of the offers versus what’s available from their own banks. Savvy banks are working to influence this dynamic and present their digital unsecured lending products – with rapid delivery of funding - to capitalize on this market movement.
Why digital unsecured lending now?
In the past few years, the unsecured lending business has evolved into a fast-moving marketplace with strong and steady growth. Balances are growing, but delinquencies are falling due to the strong economy, low unemployment and increasing use of big data in underwriting.
Here are three key reasons why traditional lenders should act now:
1) Unsecured lending is a growth opportunity. Most major banks and credit unions have not aggressively pursued unsecured lending beyond credit cards, missing out on significant growth in the past few years. There are now nearly 3 million more consumers with personal loans compared to two years ago and quality is improving: prime and above-prime originations increased by double-digit percentages between Q2 2016 and Q2 20171.
2) The rise of fintechs. Fintech lenders have become the largest originators of personal loans, capturing over 30 percent market share, up from 3 percent just five years ago2. These non-bank lenders are creating and meeting significant new demand in areas not traditionally served by banks, focusing on nonstandard credit profiles that expand the market for borrowers. Fintechs are proving that you can use advanced data analytics and other digital tools to safely lend to near-prime and subprime borrowers. And consumers heavily favor fintechs for personal loans because of advantageous terms, greater transparency, and faster approval and funding.
The experience of Goldman Sachs shows the potential for traditional institutions in this market. In just two years, its Marcus online banking platform made $4 billion in unsecured loans and took in more than $20 billion in deposits3.
3) Building lasting business relationships with desirable customers who prefer digital products and services. Millennials are an obvious target for digital unsecured lending. Bank customers typically form strong and lasting relationships with products and brands when they are between 25 and 34. This is when consumers are beginning to advance professionally and amass wealth. Millennials are also small business owners and entrepreneurs, and unsecured lending is an entrée to a long-term business relationship. If major banks want to form lifetime relationships with this new generation of customers, they need to match the digital customer experience and offerings of fintechs and peer-to-peer lenders.
If you’re considering the unsecured lending market, please contact me at Lane.Martin@Capco.com or to learn more, download our recent white paper, Accelerating Entry Into the Digital Unsecured Lending Market. In the paper, we share real-world experiences and distinctive insights from our work with large regional and multinational banks entering the digital unsecured lending market to increase revenue now and grow their business for the long haul.
1 TransUnion, Q3 2017 TransUnion Industry Insights Report (2017)
2 TransUnion Consumer Credit Database (2017)
3 DeNisco Rayome, Alison. “How mobile, AI, and omnichannel tech will revolutionize the future of banking.” TechRepublic. 24 August 2018
4TNS, Direct Banks and the Future of Consumer Banking (2013)