In recent months I have heard complaints from some in the consumer finance industry that it is getting tougher to make good loans. And, by “good” I mean loans to quality consumers with a high percentage of probability that the loans or credit sales will be repaid. Are you seeing this?
Yet, the Federal Reserve Board issued a recent study that a majority of Americans cannot come up with $400 to meet an emergency. So, the need for small dollar lending could never have been greater than now, could it?
My observation is that there are at least three forces at work:
- Competition. It seems that some markets are saturated not only with traditional consumer finance companies, but also with lenders making small dollar loans through other channels—e.g., internet lending, vehicle title loans, payday advance loans, and traditional pawnshop advances.
- Demographics. Traditionally, installment borrowers have been wage-earners and others on some form of recurring income. But, this type of consumer is slowly disappearing, giving way to those whose income is not static, and may be better described as erratic. Traditional installment creditors are having a tough time gauging the capacity of such consumers to repay through their traditional ability-to-repay analyses.
- Culture. The world of having a strategic plan to pay for one’s lifestyle seems to have changed. There once was a time few could borrow or make a purchase on credit without a definitive plan to pay back the money. Now, there seems to be less forethought demanded by lenders and credit sellers. This cultural phenomenon may better be described as a change of character. (Recall that all lending once was premised on the three “C’s”: Character, Capacity and Collateral).
The thought occurs to me that creditors who have adapted Fintech Lending and millennial marketing may be taking your customers away from you because of all three of these forces.
I have written about FinTech in the past. See here. But what I am just beginning to understand is that Fintech Lending is nothing more than a function of utilization of a tremendous number of data points in evaluating credit risk. Rather than eye-balling a customer and doing a traditional credit check, those investing in FinTech lending are using algorithms with “big data” to develop non-traditional methods to determine creditworthiness. It has been reported that Lenddo makes use of more than 12,000 data points gathered from social websites such as Yahoo, Google, LinkedIn, Twitter and Facebook, “to assess a consumer’s potential to pay off loans.” So, perhaps competition is eating your lunch.
And, then there is the force of demographic change in our country. The gender, ethnicity, education level and job status of today’s small dollar borrower is a world away from what it was in the 1990’s. Today’s consumers go to different platforms and sources for finding out about credit availability. Those lenders who have figured out where their customers go to find loans, and figured out how to market to them are also eating your lunch.
Let’s all spend some time over the next few months on Marketing 2.0.
Practice Pointer: Investing in marketing and FinTech may be costly but may be the difference between remaining in business and closing up shop.
Please note: This is the sixty-fifth blog in a series of Back to Basics blogs, in which relevant and resourceful information can be easily accessed by clicking here.