FinTech Insights: Risk Appetite Changes as Lenders Mature

Nidhi Verma
Blog Post08/30/2018
Analytics

Between 2011 and 2018, FinTechs have been a key driver of the rapid growth in the personal loan market. In the first quarter of 2018, FinTechs originated 40% of total personal loan originations, up from 8% in 2013.

While growth has been tremendous, last year showed signs of a plateau in new loans booked. In a recent TransUnion webinar, I used insights from Prama to uncover the drivers of growth and performance for FinTechs.

Risk appetite changed as FinTechs matured

Recently, risk appetite has decreased, reflecting a focus on higher-quality books. FinTechs are making a strategic effort to change the risk-return dynamic, and we see this reflected in the origination trends by risk tier.


As a result, more than half of the amount financed by FinTechs was concentrated within the prime and prime plus risk tiers. An increase in the average amount financed across the risk spectrum drove growth in overall outstanding balances.

Vintage performance show signs of improvement
Near prime consumers

Performance of recent vintages for near prime consumers with FinTech loans drastically improved after some worsening in the early 2016 vintages. Despite this overall improvement, recent vintages for loans in the range of $5,000 to $10,000 have worsened. However, when we examine performance by APR ranges within the $5,000 to $10,000 loan amount financed category, it indicates that FinTechs are pricing loans effectively aligned with risk.


Prime consumers
Vintages for prime consumers worsened briefly, but recent vintages have returned to the performance levels we observed before 2016.

Score migration presents opportunities for FinTechs
Near prime consumers

About a quarter of near prime consumers improved their scores enough to move to prime or higher risk tiers, only 12 months after origination. This means that FinTechs with score cutoffs of prime or above could be missing opportunities to lend to a number of qualified consumers, who are likely to improve their scores in a short time.

VantageScore 3.0 at 12 MOB

Origination Year Same Better
2013 43% 20%
2014 39% 26%
2015 37% 25%
2016 36% 25%

Prime consumers
For prime consumers who opened a personal loan with a FinTech, score migration has improved slightly for the 2016 vintage. In this instance, if FinTech lenders have a score cutoff of 721, the prime plus risk tier, they are missing out on 20% of customers who may improve their score sufficiently in one year.

VantageScore 3.0 at 12 MOB

Origination Year Same Better
2013 38% 18%
2014 38% 19%
2015 36% 19%
2016 35% 20%

After a long period of sustained growth, we are seeing signs of a stabilization in volumes and a focus on credit performance. As a result, FinTech lenders originated more prime and above loans, with higher average amount financed and pricing them competitively. With these efforts, recent vintages are showing a rebound after 2016, and delinquency rates have stabilized for FinTechs.

FinTechs have an opportunity to leverage on-demand market intelligence to measure changes and execute in the fast-moving personal loan market. To understand more FinTech market insights, watch the on-demand webinar.

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