Growth in Canadian FinTechs Having Impact on Canada’s Banking Landscape
New TransUnion study considers common myths around the profile of FinTech borrowers in Canada
- FinTechs are not just attracting younger Canadians: 46% of FinTech borrowers are over the age of 40
- Short-term loans are not the primary focus for FinTechs: 88% of FinTech loan terms are between 13-60 months
- FinTechs are not just catering to ‘underbanked’: 51% of FinTech consumers have 3 or more existing credit products
A new study from TransUnion explores the evolving trends around the FinTech lender landscape in Canada. The research study analyzed over 21 million non-mortgage credit products originated in Canada from Q1 2017 to Q2 2018. The study’s findings reveal 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.
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, 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,” observed Matt Fabian, director of financial services research and consulting for TransUnion Canada of Canada, Inc. “It is apparent that FinTechs attract Canadian consumers across different ages and levels of credit experience by providing a differentiated, seamless consumer experience. Looking to the future, this creates both competitive challenges and opportunities for increased partnerships between traditional banks and FinTech firms.”
Key findings include:
FinTechs appeal to both older and younger generations.
- Contrary to popular belief, FinTech borrowers are not exclusively younger, while many FinTech borrowers are more digitally savvy Millennials and Gen Z consumers, FinTech consumers have a diverse age demographic.
- Specifically, nearly half (46%) of Canada’s FinTech consumers are over the age of 40, compared to 53% for consumers with personal loans from traditional banks.
- This 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.
FinTechs cater to all types of Canadian consumers – versus focused on the ‘unbanked’ or ‘underbanked’.
- While FinTech lenders are sometimes perceived to cater largely to the unbanked or underbanked, the study reveals that many FinTech consumers have multiple existing sources of credit elsewhere.
- 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.
FinTech lending extends across the full spectrum of loan terms.
- 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.
- Around 88% of FinTech-issued personal loans have a term longer than 12 months, versus 68% for personal loans issued by banks. In fact, banks issue a far higher percentage of personal loans with terms of 12 months or less (32%) compared to FinTechs (12%).
FinTechs are willing to embrace increased risk compared to traditional lenders – with associated higher delinquency rates
- The study findings show 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. This 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, 65% of FinTech installment loans were originated to consumers in the subprime segment (TransUnion CreditVision risk scores below 640). In contrast, 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).
- 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, 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.
“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,” said Fabian. “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. But there is no doubt that we will likely continue to see growth and evolving competitive dynamics in the FinTech space in Canada.”
While the industry is still relatively new, with 61% of FinTech start-ups founded between 2012-2017, FinTechs now represents over 25% of the PayTech market.
About the TransUnion Canada FinTech Study
TransUnion’s FinTech Study is an in-depth overview of the FinTech market in Canada. The report includes a comparison of FinTech lending across various dimensions, including demographics, origination strategy and loan performance, and highlights potential success factors and upcoming challenges for the industry. The report was originally presented at the 2019 TransUnion Financial Services Summit on September 24, 2019 in Toronto, ON. To find out more about TransUnion Canada’s FinTech and wider business services visit www.transunion.ca/business.
About TransUnion (NYSE: TRU)
TransUnion is a global information and insights company that makes trust possible in the modern economy. We do this by providing a comprehensive picture of each person so they can be reliably and safely represented in the marketplace. As a result, businesses and consumers can transact with confidence and achieve great things. We call this Information for Good®. TransUnion provides solutions that help create economic opportunity, great experiences and personal empowerment for hundreds of millions of people in more than 30 countries. Our customers in Canada comprise some of the nation’s largest banks and card issuers, and TransUnion is a major credit reporting, fraud, and analytics solutions provider across the finance, retail, telecommunications, utilities, government and insurance sectors. Visit www.transunion.ca to learn more.
For more information or to request an interview, contact:
Katie Duffy, Ketchum