Banks may struggle with high cost structures, outdated technology and regulatory capital pressures that limit their ability to lend.
Under the traditional banking model, banks draw on debt and equity to augment customer savings deposits to make loans. Consumer credit decisions are often based on credit scores, backward-looking measures of consumer credit worthiness, which may be augmented with data such as income and employment status.
Alternative lending platforms use a broad set of data, not just credit scores, that can help predict a borrower’s willingness and ability to repay a loan in the future.
For borrowers, alternative lending may provide access to credit on terms more attractive than would be offered by credit card companies.
With alternative lending, technology-enabled models rapidly underwrite borrower credit risk to determine appropriate loan pricing, terms and amounts. Through these platforms, loan investors, which are predominantly large institutions, provide capital for loans directly.
Platforms may use partner banks to formally originate the loans that they underwrite. The partner banks typically conduct oversight on the platforms’ underwriting models and ensure that underwritten loans and servicing procedures comply with applicable laws. In some cases, the partner banks or the platforms may maintain a continuing economic interest in loans sold to investors.
Borrowers are turning to fintech lenders in record numbers, reflecting demographic shifts and an increasing preference for conducting business online.
Source: TransUnion consumer credit database as of 12/31/2018