The personal loans business is at an all-time high right now. Changing attitudes towards traditional banking and the rise of new online fintech banking solutions are two of the main reasons behind this trend.
Even though interest rates in the UK are still very low at 0.75%, high denial rates, bureaucratic red tape and extortionate fees are also benefiting non-bank fintech lenders.
New Fintech Lenders are Becoming a Threat to Traditional Banks
Fintech start-ups like Lendable and Ratesetter are becoming a real threat to the £200bn a year personal loans market, and major banks are taking notes. The rise of online loan brokers is appealing to many especially when you consider that providers like iLoans allows consumers with less than stellar credit ratings access loans from a variety of lenders through one single application is also making fintech solutions more attractive.
In a recent Dectech study on the openness of UK consumers to fintech financial products like mortgages, loans and current accounts, it was found that UK consumers were increasingly open to getting personal loans through fintech providers than any other financial product.
In the study, over 40% said that they would be more than happy to choose a non-bank fintech lender for a personal loan. 33% of respondents said that they would consider having a current account with a fintech, and 26% said they would be happy to open a savings account with one.
Brand Recognition is Still a Barrier
According to this same study, the only factor stopping fintechs from going fully mainstream was low brand recognition. Lower tier traditional banks, like Virgin Money for instance, were still much more recognisable than top fintech providers like Nutmeg. In the study, 83% of responders said that they could recognise Virgin Money, versus only 26% for Nutmeg. And all but a few fintechs were recognised past the double-digit mark.
Behavioural Science Explains the Shift Towards Fintech Solutions
According to Dectech, a lot of the changes in the financial industry can be explained through behavioural science. It also explains why consumers would consider fintechs for certain products more than others. One of the factors cited was loss aversion, the principle that people are more sensitive to potential loss than gains. This could explain why more consumers would consider choosing a fintech provider for a personal loan over a savings account for instance.
They also found that consumers were much more loyal when it came to their personal accounts than with their lenders. They said that the average consumer would switch lenders ever 3 years, versus 12 years for their current account provider. Because of increasing openness to alternative lenders and higher churn rates, Dectech suggested that banks should adjust their strategy to target this particular segment.
Traditional Banks Should be Leveraging Their Trust
If traditional banks want to remain competitive, they will have to leverage their trust so they can keep savings account holders, while trying to compete with alternative lenders which seem to be outperforming them by offering better rates, lower wait times, and an overall better user experience.
According to Dectech’s director, Dr Henry Scott, incumbent banks should start getting worried about fintech solutions because of the increasing appetite for these types of products. And this is especially true when factors like price are superseding trusts. The threat fintech poses will only increase with more brand recognition, and they could start taking up some important market shares from the traditional banking sector.
Fintech Lenders Offer a Better User Experience
But one of the main reasons why consumers are leaving traditional banking in droves in favour of Fintech solutions is the overall better user experience. Consumers are already used to doing most of their banking online, and moving to fintechs just seems natural to them. As a matter of fact, it was estimated that over 895 million UK consumers logged into their account online in 2016, versus only 427 million physical visits to their bank.
Consumers in the UK and everywhere in the world aren’t excited at the idea of having to commute to their local branches to do their banking. And the whole process of having to physically apply for a loan, sitting with a representative, and going through the gruelling approval process are all pressures that most consumers would rather avoid.
Digital applications are rising in popularity across the globe, and traditional banks are slowly playing catch up to keep with the times. One of the ways they are trying to address this increasing demand is by synchronising their online products with their traditional banking services. They’re also trying to keep customers by adopting new technology. For instance, Barclays recently decided to switch to voice recognition instead of personal identification numbers for more convenience.
More Regulation is Helping Legitimise the Fintech Sector
Lack of trust towards unregulated lenders was always one of the reasons why the traditional sector was able to dominate the alternative sector. But things are changing fast. The fintech industry has seen a lot of capital being injected by private equity enterprises, and online fintech providers are now fully regulated by the FCA.
This had the effect of increasing trust for products like payday loans for instance, which used to be seen as dodgy not too long ago. It also allows consumers to get better rates with these kinds of loans as well. More transparency means that borrowers have greater recourse against alternative lenders. Users also appreciate flexible options like multi-platform applications and instant approval/denial which traditional banks can’t offer. And through aggregators, applicants can have a view of competing APRs fast and find the best lender from a large pool of lenders almost instantly.
The fintech industry is fast changing the way the average consumer banks, and we can only expect them to rise in popularity in the years to come. We could see a future where most personal loans will be handled by fintech providers, which could mark a major shift in the industry and completely change the traditional banking landscape.