In a recent article reported by CNBC, the unsecured personal loan market reached a record high last year, surging 17 percent year-over-year to $138 billion. Personal loans encompass three main categories: debt consolidation, home improvement financing, and retail (driven by a surge in e-commerce and online shopping).

“The rapid growth in consumer loans sits squarely on the shoulders of fintechs. They continue to be the main driver,” stated Jason Laky.

According to the article, fintech companies issued 38 percent of all U.S. personal loans in 2018 – an increase from 35 percent in 2017 and just 5 percent as recently as 2013. Traditional banks’ share of those personal loans decreased from 40 percent five years ago to 28 percent in 2018, while credit unions decreased from 31 percent to 21 percent over the same time period. While their market share shrank, they still saw overall growth in total loan balances, according to Laky.

The data illustrates that in 2018, the majority of the personal loan growth occurred at the subprime tier, which grew the fastest at 4.3 percent year-over-year. Any inherent risk in the pool of subprime loans is tied closely to the outcomes of the economy, Laky said. “Subprime borrowers are the ones that, if the economy turns and growth slows, are likely to be at risk of losing their jobs or hours, that creates financial stress. As long as we believe [the] economy is still on solid path of growth, there shouldn’t be an issue,” Laky stated. According to Laky, a steady rate of delinquencies is an indication that the growth in subprime loans does not suggest an impending credit crisis. The report notes that delinquencies “have remained stable with little to no change across most risk tiers.”

As we previously reported, in July 2018 the United States Department of the Treasury released a report identifying improvements to the regulatory landscape that the agency believes will better support nonbank financial institutions, embrace financial technology, and foster innovation. That report stated that from 2010 to the third quarter of 2017, more than 3,330 new fintech companies were founded, 40% of which are focused on banking and capital markets, and in the aggregate, global investments in fintech companies reached $22 billion in 2017, a thirteenfold increase since 2010.

As the Treasury report pointed out, consumers increasingly prefer fast, convenient, and efficient delivery of services, and “new technologies allow companies with limited scale to access computing power on levels comparable to much larger organizations.” We expect such trends to continue.