Fintechs continue to drive consumer loan growth, but there’s more they need to know

22.5 million Americans owe a collective $222 billion in personal loans right now. That’s more than double the $102 billion owed in 2016, indicating the surge in personal loans. Data shows that post-pandemic, personal loan activity picked up again in the third quarter of 2022 as Americans struggled to keep up with the high cost of living amid record-high inflation.

Fintechs are taking the lion's share of the personal loan market because of their growing presence and consumer satisfaction with fintech lenders in recent years, shows a new U.S. Consumer Lending Satisfaction Study by J.D. Power.

American Express ranks highest among personal loan lenders in overall customer satisfaction, closely followed by BestEgg. Whereas, Discover and SoFi share an equal ranking in the third spot.

The study measures overall customer satisfaction based on performance in five categories: borrower customer service, customer experience managing a loan, experience obtaining a loan, how customers are kept informed about a loan, and whether a  loan met a borrower’s needs.

Customers are more satisfied with fintechs compared to non-fintechs when it comes to lending in 2023 – last year, Marcus by Goldman Sachs ranked highest among personal loan lenders in overall customer satisfaction with 776 points on J.D. Power’s 1000-point satisfaction year-over-year scale. 

This year, overall customer satisfaction scores for fintech brands rose 16 points on the 1000-point satisfaction scale compared to a 12-point increase in customer satisfaction across all non-fintech brands. 

Fintech lenders have been increasingly competing with traditional banks. While banks still hold consumers’ trust and the biggest slice of the pie – actual accounts – they’re falling behind their digital-first rivals when it comes to customer satisfaction. As borrowing from banks hasn’t always been smooth sailing for consumers, consumers have sharply expanded their reach to unsecured personal loans.

Additionally, fintechs are gaining an advantage over non-fintech lenders due to their digital and analytical native business models. Fintechs’ analytical approach helps them to acquire insights, process, and analyze vast amounts of data to identify patterns, trends, and relationships to make credit and business decisions. Fintechs were also reported to have the edge on problem prevention, as 83% of customers indicate never having a problem with their loan compared with 74% for non-fintech borrowers.

“Fintech meet rates on key J.D. Power KPIs in these areas are higher, allowing them to drive satisfaction at a 30% faster rate,” said Bruce Gehrke, senior director of wealth and lending intelligence at J.D. Power.

The economic challenges, coupled with changes in consumer spending and saving behaviors, have influenced consumer lending trends as well. Although fintechs are fueling digital lending, the study also highlights what it will take for fintechs to stay in the game for the long haul.

How to build customer loyalty?

Fintechs continued to drive personal loan growth in the first quarter of 2023. However, companies likely need to come up with effective engagement strategies to build and maintain customer loyalty as more players enter the increasingly growing lending space.

A satisfied customer is a loyal customer and customer satisfaction goes beyond a box-ticking exercise for brands. It starts with the provisioning of lending services that is segmented into a three-step pecking order, each level providing the opportunity to stand out from peers and drive loyalty, according to the study.

The first step is to deliver access to core digital capabilities and create a streamlined application process. This element is foundational in setting consumer expectations of what is to follow. Falling short in the very beginning can have an effect on the entire customer experience going forward – only 56% of consumers experience plain sailing in starting their loan application.

Next comes the service level, which includes providing a user-friendly web interface that scales down complex problems and offers payment clarity as well as ease of interaction for customers, in the case of a query. These ingredients can create a success recipe for an online lending model and may set the tone for establishing a longer-term customer relationship. But less than half (44%) of consumers are provided with these features from their lenders.

Last but not least – relationship-based interactions and value exchanges top the list. This is where brands can shine and attract greater advocacy and loyalty. This comprises offering tools and services to facilitate the lending process for consumers to the nth degree – from providing detailed information on additional products and services to better disclosure to consumers of their loan obligations. However, only 12% of consumers found lenders meeting these three practices when applying for a personal loan.

Digital or human interaction – which is preferable and why?

Historically, consumers have preferred a human touch when dealing with money. However, the study reveals that with more complex long-term borrowing such as mortgage loans, consumers look for a mix of personal and digital interactions now.

Human interaction is still necessary for some consumers. 30% of loan applicants interacted with a person during their application, and 70% of those said it was necessary to obtain approval. That personal approval interaction did not necessarily lead to greater satisfaction. However, when personal interaction was the primary channel chosen for the applications of lower credit profile borrowers, satisfaction was 15 points higher and Net Promoter Scores (NPS) went up 6 points. Satisfaction and NPS were the same for higher credit borrowers.

Self-service is the overall application preference of borrowers by a slim 10% margin. Borrowers wind up submitting digital-only applications twice as often, with 62% of lower credit profile borrowers opting against applying with a live representative due to the shorter period of time involved in the digital process.

Comprehensive loan terms have made consumers more comfortable with digital lending products such as short-term personal loans. Moreover, greater acceptance and availability of digital financial transactions across the financial services spectrum is smoothing the way for digital lending as well.

Gen Z stands out as particularly informed

When it comes to younger cohorts, Gen Z is emerging as a growing consumer segment that is already showing distinct characteristics when it comes to technology and financial services. Lenders may need to update their strategies to adjust their approach to marketing, lending, and providing services to Gen Z to meet their needs as they come of age.

More than half (51%) of respondents from Gen Z “strongly agree” that a borrower should do their thorough research before taking a loan compared to 39% of Pre-Boomers/Boomers and 40% of Gen X respondents. On average, Gen Z tends to be better savers than other generations – 53% of this cohort is comfortable with their level of long-term savings and capability to cover six months or more of expenses compared to 47% of Gen Y, 40% of Gen X and 39% of Boomers. Additionally, 58% are confident that their level of debt is manageable, with 61% having a financial plan in place for the future.

While many believe that fintech lending has likely improved credit access to consumers especially by tapping underserved markets and enhancing lending performance by providing faster or cheaper services, there have also been concerns around credit risk involving fintech lenders from a regulatory standpoint. 

Tougher compliance and near-term emerging regulation may impact fintechs and their lending capabilities going forward. But according to Gehrke, that impact may be subjective as every fintech has an individual market approach based on its business model. 

“We wouldn’t expect to see fintechs being impacted in a way that’s markedly different from traditional firms,” he added.