What you believe about Canadian fintechs may be a myth

by Steve Randall25 Feb 2020

Financial technology firms – fintechs – are growing fast but with their rapid growth comes several common beliefs that a new report says are myths.

TransUnion Canada analyzed more than 21 million non-mortgage credit products originated in Canada between the first quarter of 2017 and the second quarter of 2018.

And some common misconceptions, such as fintechs only appealing to younger Canadians, are unfounded the study reveals.

"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.

Here are some of those common myths:

  • Myth 1 – Fintechs only appeal to younger people

The study reveals that although tech-savvy millennial and Gen Z Canadians may be attracted to fintechs, 46% of users are over 40. This compares to 53% of traditional lenders’ customers (specifically for personal loans).

  • Myth 2 – Fintechs are for those who can’t get a traditional account

Again, some of those who are deemed as ‘unbanked’ or ‘underbanked’ may become fintech customers but the study shows that 51% of fintech customers have at least 3 credit products with traditional lenders when they originate a fintech loan.

  • Myth 3 – Fintechs mostly originate short term loans

The study shows that 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%).

Risky lending

The study also looked at the credit profiles of those originating loans with fintechs versus the traditional lending industry.

It found that the fintechs do tend to have a higher number of subprime borrowers with 65% of fintech installment loans originated to consumers in the subprime segment (TransUnion CreditVision risk scores below 640) while 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).

"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 – 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."

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