The market for consumer loans in the US is booming. According to data from TransUnion, last year, the total amount of consumer loans outstanding hit a record $138bn, a 17% jump from the year prior.

TransUnion says the “main driver” of this rapid growth is lending by upstart fintechs, which accounted for over a third (38%) of all personal loans issued, a huge leap from just five years ago when they accounted for 5%.

That fintechs have captured so much of the consumer loan market isn’t surprising. Following the Great Recession, many of the established financial institutions that had previously been the first place many consumers turned when they needed a loan, such as big banks, cut back on consumer lending.

That created an opportunity for nimble and forward-thinking upstarts that have used a combination of technological innovation, flexible underwriting models, slick and efficient web and mobile-based customer experiences, and clever customer acquisition strategies to not only fill the void but expand the
consumer loan market.

Fintech lenders come in many shapes and sizes, with different companies often targeting specific types of consumers or purchase categories.

SoFi, for instance, offers personal loans to borrowers it believes are financially responsible and incorporates non-traditional factors such as educational background and professional history into its underwriting model.

Another fintech lender, Affirm, works with retailers to offer their customers the ability to pay for purchases over time. When target customers check out, they are offered the ability to apply for a closed-end loan to finance the purchase as part of the checkout process. Affirm says it approves 34% more applicants than its competitors and helps partners increase conversions by 20% and average order values by 87%.

Large financial institutions, such as Goldman Sachs, are applying similar approaches to build new consumer lending businesses of their own.

Although they approach the consumer lending market in different ways and often target different types of borrowers, almost all fintech lenders share common traits, including digital-only application processes that minimize the amount of work borrowers have to do and that offer instantaneous or nearinstantaneous decisions.

More growth on deck

Clearly, fintech lenders are firing on all cylinders and there’s every reason to believe that they will continue to grow their share of the consumer lending market and be a force for expansion of the market overall.

Special bank charters for upstarts and a push for a nationwide system for regulating consumer lending  could make it even easier for fintechs to grow their businesses. While battles are brewing over the trend towards simplified regulation, momentum would seem to be on the side of the fintechs.

But that doesn’t mean that concerns about this new generation of consumer lending are unwarranted.

Already, a number of companies have run into trouble with regulators. SoFi, for instance, settled last year with the Federal Trade Commission (FTC) over charges that it made false claims relating to the savings consumers could achieve through student loan refinancing.

More worrying for the fintech space than marketing practices issues is the possibility that fintech lenders aren’t on as solid footing as it might seem.

The vast majority of these lenders were formed after the Great Recession and thus have only existed during a period of economic recovery and growth. While there’s an argument to be made that banks have been too stingy with consumer credit over the past decade, it’s also possible that at least some
fintech upstarts are not being careful enough and that risks are being masked by a robust economy.

But what will happen when fintechs’ loan portfolios are tested by an economic slowdown or financial crisis? Will we learn that at least some of fintech lenders’ success in originating loans was due to a willingness to lend to riskier borrower pools and not just superior products and customer experiences?

Here, the case of Wonga’s demise in the UK could be instructive. While Wonga, as a payday lender, had regulatory exposure most fintech lenders don’t, the effects of an economic downturn could be equally if not more problematic.

Time will tell. But even if that proves to be the case, banks shouldn’t dismiss what fintech lenders have done to the market. The way they approach their relationships with customers and have created digital-first experiences to serve them is important regardless of the strength of the underwriting models used to approve or deny loan applications.

And with some fintech lenders increasingly looking to expand their footprints into other financial services offerings, banks should remember that a loan isn’t always just a loan – it can also be the foundation on which a broader long-term customer relationship can be built.

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