New TransUnion study features personal loan performance of recent vintage loans
FinTech lenders continue to gain market share in the personal loan space while maintaining their portfolio risk-return performance. Results from TransUnion’s “Fact versus Fiction: FinTech Lenders” study were released during the Digital Lending + Investing Conference in New York.
To better understand the personal loan market, TransUnion studied unsecured personal loan originations over the past several years, as well as more detailed portfolio performance between 2014 and 2016. The analysis differentiated between those loans issued by banks, credit unions, FinTechs and traditional finance companies to compare performance across lender types.
The study found that the balance share of these loans originated by FinTechs had dramatically risen in recent years. At the end of 2016, FinTechs represented 30% of all personal loan balances, up from about 4% in 2012 and less than 1% in 2010. This trend continued through the first six months of 2017, with FinTechs now representing 32% of personal loan balances.
|Timeframe/Lender||Banks||Credit Unions||FinTechs||Traditional Finance|
|2017 (Through June)||29%||24%||32%||15%|
|Full year 2016||26%||23%||30%||21%|
|Full year 2015||27%||22%||28%||23%|
|Full year 2012||35%||32%||4%||29%|
“The personal loan market has rebounded nicely from the recession, with material consumer demand for personal loans across the credit spectrum,” said Jason Laky, senior vice president and consumer lending line of business leader at TransUnion. “Many lenders exited the market during the recession. Our study clearly shows that when demand for personal loans recovered, FinTechs seized the opportunity.”
As part of this study, TransUnion developed a coarse risk-return metric*. While loans provided by FinTechs experienced higher delinquencies than competitors, specifically within the lower credit risk tiers, TransUnion’s study found that they generated effective portfolio risk-return ratios that exceeded those of banks and credit unions. As of Q2 2017, FinTechs averaged an 8.7% return compared to 6.7% for banks and 6.3% for credit unions. Traditional finance companies average the highest return at 11.5%.
“The FinTech business model appears to be working nicely. Their use of the latest technologies combined with cutting edge alternative and trended data has likely helped them become leaders in the personal loan industry,” said John Wirth, vice president of FinTech strategy and market development at TransUnion.
The study demonstrated how FinTechs focus their originations in the near prime and prime risk tiers. As of Q4 2016, 59% of FinTech balances originated were in those two risk tiers. This is slightly higher than the 57% rate in Q1 2014. “Counter to general assumptions about FinTechs, only around 10% of originated FinTech loan balances are subprime, compared to 14% for the overall market for personal loans,” added Wirth.
Personal Loans Continue to Grow
The study also observed general personal loan trends. Personal loan total balances and consumer participation have both grown considerably. As of Q2 2017, 16.1 million consumers possessed a personal loan, compared to 14.8 million in Q2 2016 and 13.1 million in Q2 2015. Just five years ago in Q2 2012, approximately 9.8 million consumers had a personal loan. Total outstanding balances have risen from about $45 billion in Q2 2012 to $106 billion in Q2 2017.
While conventional wisdom holds that personal loan borrowers fall in the subprime risk bucket, TransUnion data through Q2 2017 show that personal loan adoption is greatest in the near prime (26%) and prime and above (49%) risk levels. Subprime constituted only 25% of such loans.
The most recent TransUnion data show that the number of lenders issuing personal loans has decreased in recent years from 7,245 in 2012 to 6,896 in 2015 and 6,680 in 2016. However, the number of lenders issuing large volumes of personal loans (at least 10,000 annually) has nearly doubled in the last 5 years from 68 in 2012 to 128 in 2016.
“The evolution of the personal loan industry during the last five years has been primarily driven by the rise of the FinTechs,” said Laky. “We believe the personal loan industry is in a prime position to continue growing, especially as traditional lenders incorporate some of the technologies and other components used by FinTechs.”
*To develop the risk-return metric, the first step was to estimate APRs and calculate interest income over the first year on books for any given cohort of personal loans. Next, loan balances that were delinquent 60 or more days past due were subtracted from this interest income measure as a conservative estimate of losses. The net difference was then divided by the total original balance of the cohort to arrive at a risk-return measure. For example, a $100M portfolio generating $15M in interest income and having $5M in 60+ DPD balances in the first year would yield a risk-return measure of 10%. This is a coarse measure of risk versus return, in that costs associated with funding, branches, operating expenses, collections, and technology are not accounted for—but it is a good starting point for comparison of performance across lender types.
Source: TransUnion – For more information about the study, please click here