The current state of the installment loan industry
Over the past month, I have explored the real estate fintech market and the small business lending space. The vertical that really kicked off the online lending space, however, was personal loans, especially installment loans. There were a few trends that led to the boom in the personal lending space.
It was a much easier proposition for the first companies to tackle given that it was an attractive product for the mass market in a vertical largely ignored by the banks. The idea was simple, to rely on traditional subscription techniques but to put the product online for a better customer experience.
The companies that set up in this space very early on, LendingClub and Prosper, were able to weather the financial crisis relatively unscathed. Even though they were small at the time, their relatively conservative approach to underwriting served them well in the years to come. Some of the best years of returns for investors on LendingClub and Prosper came as the United States began to recover. The basic trend I saw when I first became interested in fintech was that bringing lending into the digital age was inevitable as consumers grew more comfortable with it. online transactions. This turned out to be true, but at a slower pace than I had initially expected.
Fast forward to today and the online personal loan market has grown quite significantly. What’s interesting is that the products have remained similar over the years. With maybe a few exceptions, fintechs and now banks typically offer fixed loan terms of 3 or 5 years. In addition, direct mail still represents a significant sum of marketing dollars for many players in the industry. In the digital age this is quite surprising and something that I think will continue to evolve slowly.
LendingClub, despite the difficulties encountered in 2016, is now the leading provider of personal loans in the United States. Other players are filling the gaps, targeting almost every credit profile imaginable. We have companies like Avant and LendingPoint that focus on premium consumers. LendingClub, Prosper and Upgrade have increasingly focused on premium and super premium consumers. We have companies like Upstart and SoFi that cater to millennials and those with a low credit profile but would otherwise be considered blue chip consumers. SoFi in particular is an interesting case as they seek to become a household name, recently acquiring the naming rights to the NFL Stadium under construction in Los Angeles.
The subprime segment is still less competitive than other areas, but it has also proven to be a tough place to make money. The leaders here include Opploans, LendUp, Elevate, and Enova. In many ways, this is where innovation happened in consumer lending with automated underwriting and super fast loan disbursement.
The big equalizer in the industry has been the advent of aggregation sites like Credit Karma and LendingTree. Never before have consumers been able to search for the best rate with just a few clicks. This meant that these online loan providers had to look for other ways to differentiate themselves and SoFi has, in my opinion, been the most successful in this area by being the first to offer a wide range of banking products. It is no longer enough to just have to apply for a loan online, which means that alternative ways of acquiring customers have become more important. We have even seen companies pivot on their original business model. Upstart and Avant’s Amount launched loans as service platforms, fueling personal loans at banks across the country. While there are some amazing options on the market today, the reality is that banks still have a lion’s share of customers.
It’s worth mentioning underwriting, which is a key differentiator for many of these companies compared to incumbents. Upstart has been the most outspoken about their techniques by receiving the first no-action letter from CFPB allowing them to use alternative underwriting techniques. Here’s a great update on the progress they’ve made in this area. It’s companies like Upstart in my opinion that will pave the way for better pricing and credit expansion, which is a win for the American consumer.
Big banks are playing ball
From my perspective, the market turning point came when some of the big banks finally took action. This notably includes Goldman Sachs with the launch of Marcus, their bank for consumers. Other banks, especially the smaller ones, have taken incremental steps to offer an installment loan online, sometimes with the help of a fintech, as mentioned above.
Marcus stands out for entering the market quickly, albeit late compared to when fintechs started offering loans. Marcus started offering loans in October 2016 and crossed the billion dollar mark in just eight months. The nature of how they entered the market did not come without a cost, as it was recently reported that they had lost a total of $ 1.3 billion on their consumer banking. This was the result of heavy investments in cloud infrastructure, buying startups, hiring and building call centers, etc. In addition, rumors say that their loan portfolio has underperformed compared to their competitors. Yet, as a client of their own savings product myself, I think Marcus has a bright future in the long run because they have done what many other banks have avoided.
In some ways the personal loan market has seen significant changes over the past decade, but in other ways it seems like there should have been more innovation given that some of these companies have been around since. some time. I think there are still challenges for banks and fintechs to come up with more user-friendly and unique products. We have yet to see a standalone finance offering a product to save money to a consumer before they even have to apply. However, these companies as a whole played a central role in saving consumers’ money in the form of debt consolidation loans, as consumers were able to transfer balances from other high interest debts such as credit cards to installment loans.