Are Fintechs Pushing Us Toward the Next Financial Crisis, or Helping Us Avoid It?
With economic analysts warning we’re due for the next financial crisis, fintechs and other non-bank lenders are finding themselves in the crosshairs.
America sure loves a repeat. The Golden State Warriors and the Cleveland Cavaliers have played each other in every NBA Finals since 2015. Starbucks’ pumpkin spice latte is back for the fall, as is Count Chocula. We’re on Episode IX of Star Wars, the 11th Spider-Man movie is scheduled for release next year, and yet another remake—the third remake—of A Star Is Born is in theaters now (and it’s apparently pretty good).
So, how about Market Collapse 2: Supercrash?
Or perhaps we should call it Global Financial Crisis Reborn.
Or, simply: Recession (2019).
Yes, ten years after the last meltdown, a number of economic analysts are convinced we’re due for another one. They’re warning it could be much worse than the last one, considering the indicators and likely triggers, and advising us that it’s not a question of “if” but “when.”
As we wrote last week, one effect of this doomsaying is that lenders are under currently increased scrutiny from regulators, as well as consumers at large. And non-bank lenders could soon find themselves in the crosshairs. Just take a look at this recent Quartz article, which charts the rise of fintech startups offering personal loans:
“Ten years on from the credit crisis, Americans are again piling on debt in all its varieties, from credit cards to student loans to mortgages. These days, personal loans—a category turbocharged by fintech upstarts—are growing especially quickly. With an increasing number of shaky borrowers taking on this debt, the risks are growing for lenders during the next economic downturn.”
The article describes how fintechs came to account for the largest share of U.S. personal loans (36%) among their competitors: banks (26.5%), credit unions (22%), and traditional finance companies (15.5%). This foray into the market has stoked fruitful competition, with banks and credit unions currently originating personal loans at nearly twice the rate they did in 2010.
But as with all stories of rapid growth, dark forebodings follow:
“A major test will be when the economy slows down, or even contracts. As financial firms compete to lend money, they’ve been extending more credit to subprime borrowers who are at higher risk of default. Lately, analysts and finance execs have mentioned the ‘credit cycle’ during earnings calls more than at any time since the last downturn, according to Sentieo. The most recent personal-loan vintages have the highest delinquency rates.”
Read “Americans are splurging on personal loans thanks to fintech startups.”
What does this mean for lenders? It means that however protected you think you are, it never hurts to demonstrate your commitment to compliance and consumer well-being. The smart, forward-thinking financial firms are the ones taking the lead in accountability and transparency. They understand that the country values new ideas—but trust takes time to earn.
