Today, non-bank lenders, many of them generating leads and conducting business primarily or exclusively online, are big players in the lending markets, in many cases having taken market share from banks.

These include direct lenders like Sofi, Avant and OnDeck Capital, as well as marketplace lenders like LendingClub and Prosper. 

The timing couldn’t have been better. The slow but steady recovery that has occurred over the past eight years has seen historically low default rates, a boon to the fintech lenders that more aggressively seized the opportunities bank lenders ceded.

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Underwriting as customer experience

Fintech lenders haven’t benefited just because they were willing to lend money when bank lenders weren’t. It’s also that they have offered a better customer experience.

Not only have fintech lenders brought much if not all of the loan application process online, they created user experiences that made it easy for consumers and business owners to complete that loan application process quickly and without hassle.

For example, fintech lenders generally allow borrowers to upload documentation, and in many cases, borrowers can authorize the lenders to automatically retrieve data from their bank accounts, eliminating the need for borrowers to collect bank statements.

Borrowers are often also able to sign documents digitally, speeding the application and funding process.

But fintech lenders haven’t just created winning customer experiences by implementing web and mobile user experiences that make applying for loans quicker and easier. In many cases, they have also reinvented the way loan applications are underwritten.

Many fintech lenders have developed their own proprietary lending models, which are often different than those traditionally used by bank lenders. Some boast of using thousands of data points to evaluate borrowers and even relying very little on credit scores from the major credit bureaus.

The result: in many cases, fintech lenders are able to approve loan applications much more quickly than their bank lender competitors, and are often able to approve loans for borrowers who banks historically wouldn’t lend to.

Are cracks starting to emerge?

The narrative around fintech lenders has been that their underwriting models represent innovation.

But there’s a problem: the vast bulk of the loans fintech lenders have issued were issued after the Great Recession, and thus, the underwriting models they have been using haven’t been battle tested against an economic downturn.

Now, as recently detailed by Bloomberg, there are signs that at least some of these models might not have been as strong as fintech lenders believed them to be.

According to Bloomberg, several bonds issued by Avant, an online lender that offers personal loans, have breached or are expected to soon breach delinquency or default triggers for the first time ever.

Earlier in the year, LendingClub, which later faced scandal, revealed that its write-off rates were higher than it had predicted, suggesting to some that LendingClub wasn’t as good at assessing credit risk as it probably thought it was.

While it’s unlikely that fintech lenders will experience a collapse unless and until there’s a major turn in the global economy, 2016 appears to have revealed some cracks in the loan portfolios of these companies. Many have taken corrective action, reducing their emphasis on loan growth, for instance.

But given that non-bank lenders have been among the most willing to lend to borrowers that wouldn’t pass muster with banks, it’s entirely possible that they could be at greater risk for loss than most have anticipated when the next recession hits.

If that happens, it could offer bank lenders an opportunity to win back business they have ceded in the past eight years by applying some of the fintech lenders’ innovations around user experience.