FinTechs Reportedly Reining in Their Lending

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FinTechs Reportedly Reining in Their Lending

More than a decade ago, FinTech lenders made a name for themselves by not only creating an easier and faster way for consumers to take out personal loans but also utilizing algorithms to expand their borrowing base beyond what most banks would consider. This strategy proved especially useful during the Great Recession when major institutions pulled in on their lending even more. However, as The Los Angeles Times reports, some of these lenders are now following suit and growing more conservative with their loans.

Throughout the year FinTechs such as Lending Club and Prosper have been lending less to subprime borrowers and more to those with established positive credit. In contrast, from 2008 until 2015, 53% of the former’s borrowers were rated C, D, or E on the platform’s A through G scale. Additionally prior to 2018, 60% of borrowers were considered prime or below.

For their part, these startups are acknowledging the shift in strategy. During an earnings call earlier this year, Lending Club CEO Scott Sanborn told analysts that the company had cut approval rates by 17%. Then, in a separate earnings call last month, Sanborn stated, “We, together with others, are being increasingly picky about the loans that we are booking. Across the board, you’re seeing a number of people, Lending Club included, kind of prudently pulling in and tightening a little bit on the credit they’re offering.” Meanwhile Lending Club’s nearest competitor Prosper has similar things to say, with the platform’s chief credit officer Ashish Gupta saying, “We have tightened massively.” Gupta went on to explain that the rise in American credit card delinquencies has played a major role in why approval rates have fallen ‘dramatically.’

Of course this change isn’t limited to FinTechs. In fact this mirrors a larger lending trend overall, with the average credit score among personal loan borrowers on the rise. As the Times notes, the average score for borrowers last quarter was a record-breaking 717.

Given the current economic conditions, the move on the part of Lending Club, Prosper, and others to focus on more credit-worthy borrowers makes sense. However it will be interesting to see how the strategy plays out should a recession cause traditional lenders to pull back on their lending once again. It’s also worth noting that this updated focus could further constrict the number of “peers” investing in peer to peer loans as the returns will likely diminish. With all that, perhaps these FinTechs won’t be as disruptive in the 2020s as they were in the 2010s.

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Author

Jonathan Dyer

I'm a small town guy living in Los Angeles looking to make solid financial decisions. I write for a number of finance websites, including HuffingtonPost and Business2Community. I founded DyerNews.com in 2015 to focus on personal finance and the emerging FinTech markets.

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