FinTech takes on Consumer Lending
Subprime credit-card lending is nothing new. Banks have historically generated significant revenue by lending to consumers with bad credit, but that’s changing as young consumers are increasingly wary of the dangers of accumulating credit card debt. Instead, Americans now prefer to limit general debt and take out point-of-sale loans on larger purchases such as cellphones and furniture. These loans are issued for a fixed-term and can be quite profitable for lenders, earning interest rates north of 20% compared to 14% earned on standard credit-card debt. For merchants, offering these loans can often increase their revenue by 10% by making large purchases more attractive for customers. The catch here is that consumers still want to avoid credit card debt and prefer to take out point-of-sale loans with a third party, separating the bill from the rest of their credit card debt. As a result, large banks have not been the ones offering these instruments.
Enter a wave of fintech startups that act as the matchmaker between traditional banks, merchants, and customers by using big data, machine learning and AI when underwriting to analyze customer risk and minimize credit loss. Rather than interact with their bank, customers engage with consumer lending startups directly and they do the rest behind the scenes. One of the largest of which is GreenSky, an Atlanta-based startup valued at $3.5B, making it “America’s fourth most valuable fintech company.”¹ Greensky charges banks and merchants for their services and reported $139M in 2017 Net Income. Other notable fintech lenders include LendUp Global, Fair Square Financial, CreditShop, and PayPayl Co-Founder Max Levchin’s Affirm. Alternative lending really started to catch on in 2013 and VC funding peaked at $5.4B in 2015. Since then, new players have seen less funding as they struggle to compete with incumbents and strike partnerships with banks. Nonetheless, it is clear that fintech has found a home in consumer lending.
CB Insights publishes Global Fintech Report Q1 2018
CB Insights published its quarterly update on the state of fintech the other week. Here are a few highlights:
- Q1 2018 set a new quarterly record for global VC-backed fintech deals (323 deals totaling $4.5B). North America secured 38% more deals in Q1 than Q4 ’17, the largest increase in deals of any continent.
- In terms of total funding, Asia experienced the most growth vs. Q4 ’17 at 188%.
- Q1 saw two “unicorn” births. Brazil’s Nubank and USA’s UiPath both broke $1B in private market valuation.
- Regtech funding continues to grow – doubled in Q1– as corporations seek to address regulatory compliance concerns.
- ICO funding continues to drop amidst tighter regulation and more cautious investors.
- VCs pour more funding into tokenized securities as startups get the green light from regulators.
- Bank of China to Raise Fintech Spending, Pursue Blockchain Projects
- Consumer Lending fintech adds Blackstone executive, UC Davis dean to Board of Directors