TORONTO -

Fintech isn’t limited just to Silicon Valley. TransUnion spotted fintech developments leaving impacts in the Oil Patch, MTA and Vancouver, too.

A new study released this week by TransUnion explored the evolving trends around the fintech lender landscape in Canada, which can have an impact on how consumers secure auto financing and manage their other credit commitments. The research study analyzed more than 21 million non-mortgage credit products originated in Canada from Q1 2017 to Q2 2018.

TransUnion said its study findings revealed key insights that appear to debunk commonly held beliefs around the profile of fintech borrowers in Canada, as well as the ways that fintech lenders are employing and embracing different credit strategies compared to some of the more traditional lenders.

TransUnion explained the study defined fintech lenders as those who rely on advanced computer algorithms or other technology as their primary platform to enable, support or improve banking and financial services, and do not have an established physical network of branches or stores. Typically, study orchestrators acknowledged these are start-ups or emerging lenders that have an emphasis on an agile and sophisticated use of technology to deliver a fast and unique lending experience, or use analytics to penetrate typically underserved markets.    

“The explosive growth of the fintech industry has already had a significant disruptive impact on the traditional consumer lending landscape, and has fueled a race for digital capability amongst banks and fintechs,” said Matt Fabian, director of financial services research and consulting for TransUnion Canada of Canada.

“It is apparent that fintechs attract Canadian consumers across different ages and levels of credit experience by providing a differentiated, seamless consumer experience,” Fabian continued in a news release. “Looking to the future, this creates both competitive challenges and opportunities for increased partnerships between traditional banks and fintech firms.”

TransUnion highlighted its study findings covered an array of potential impacts, beginning with the assertion that fintechs appeal to both older and younger generations:

—Contrary to popular belief, TransUnion indicated fintech borrowers are not exclusively younger. While many fintech borrowers are more digitally savvy millennials and Gen Z consumers, the study showed fintech consumers have a diverse age demographic.

—Specifically, TransUnion discovered nearly half (46%) of Canada’s fintech consumers are above the age of 40, compared to 53% for consumers with personal loans from traditional banks.

—Analysts pointed out this finding suggests that Gen X and older consumers are almost equally attracted to what fintechs offer, challenging the notion that older age groups are more likely to only engage in traditional lender relationships.

Another broad assertion TransUnion learned through the study is that fintechs cater to all types of Canadian consumers — versus a focus being on the “unbanked” or “underbanked.” Analysts elaborated about that point, stating:

—While fintech lenders are sometimes perceived to cater largely to the unbanked or underbanked, the study revealed that many fintech consumers have multiple existing sources of credit elsewhere.

—TransUnion indicated more than half (51%) of fintech consumers have three or more existing credit products with traditional lenders at the time they originate a fintech personal loan. This mix of other products held includes credit cards, lines of credit, installment loans and home loans.

TransUnion also noticed fintech lending extends across the full spectrum of loan terms.

—The study uncovered that fintechs are comfortable (and actively) lending across the full spectrum of personal loan terms, contrary to the common perception that they are primarily focused on offering short-term loans less than 12 months in duration.

—TransUnion learned that around 88% of fintech-issued personal loans have a term longer than 12 months, versus 68% for personal loans issued by banks. In fact, the study showed banks issue a far higher percentage of personal loans with terms of 12 months or less (32%) compared to fintechs (12%).

Furthermore, TransUnion’s study determined fintechs are willing to embrace increased risk compared to traditional lenders — with associated higher delinquency rates. Orchestrators discussed that component, too, noting:

—The study findings showed that fintech portfolios are generally comprised of riskier consumers than other installment loan lenders (those consumers with lower credit scores), with a significantly higher consumer base within the subprime space. TransUnion explained this method appears to be an intentional strategy as these lenders seek to satisfy market demand among consumers who may not have access to traditional lending sources.

—Over the course of the study period, TransUnion reported 65% of fintech installment loans were originated to consumers in the subprime segment (TransUnion CreditVision risk scores below 640). In contrast, TransUnion noted that traditional banks and lenders issue more than half of their personal loans to borrowers with prime and better risk scores (TransUnion CreditVision risk scores 720 and above).

—TransUnion added that fintechs also have higher delinquency rates across all risk tiers, which they compensate for by charging generally higher interest rates for personal loans. In the subprime segment, TransUnion said fintechs have delinquency rates that are on average between 100-500 basis points higher than traditional banks and traditional lenders, but price for that risk with interest rates ranging from 20% to 30% within this segment.

Fabian added further assessments of the study findings.

“The ability to be agile, potentially with lower overhead compared to more traditional lenders, may enable fintechs to operate in higher-risk segments and carry higher delinquencies. But it is still critical to have a strong credit risk framework, and a detailed understanding of portfolio risk,” Fabian said.

“Fintech consumer profiles span diverse demographics and loan terms. As the industry continues to evolve, there are some key factors that will contribute to FinTech growth, including technology advancement, access to capital — especially at a lower cost — potential shifts in regulations, and an increasing percentage of Generation Z and millennials in the population,” he continued.

“But there is no doubt that we will likely continue to see growth and evolving competitive dynamics in the fintech space in Canada,” Fabian went on to say.

While the industry is still relatively new, with 61% of fintech start-ups founded between 2012-2017, TransUnion added that fintechs now represents more than 25% of what analysts called the “paytech” market.

To learn more about TransUnion Canada’s fintech and wider business services, visit www.transunion.ca/business.