Millennials And Fintechs Are Disrupting The Way We Borrow And Invest

Personal loan balances are growing at a fast rate. According to TransUnion data, unsecured personal loan balances reached a record high of $156 billion in 2019. It’s not just the loan amounts that are growing. The number of unsecured personal loans has grown from 16.9 million in 2016 to 22.5 million in 2019.

As the CEO and founder of a platform that provides comparison pricing on financial services, there are two main forces I see behind this growth — one at each side of the supply and demand model.

On the demand side, the rise of fintech lenders has been responsible for much of the growth in unsecured personal loans. Traditional lenders, such as banks and credit unions, are still big players. But for some, that may only be because they have either partnered with fintech firms or have adopted the new technologies and strategies.

According to TransUnion (via the Federal Reserve Bank of St. Louis), fintech lenders were responsible for only 5% of unsecured personal loan originations in 2013.

In 2019, 39% of all unsecured personal loans were originated by fintech lenders, which had a larger share in the market than banks (25%) or credit unions (20%). Experian’s estimates put the unsecured personal loan market share of fintech lenders at 49.4% in 2019, which is more than double their share in 2015. At the current rate, Experian expected fintech lending to grow to $73.7 billion by 2022.

The demand side of the equation seems to be driven by millennials, who Experian says are the generation with the fastest-growing personal loan debt levels. According to 2019 Experian data, the average personal loan balance of those between 23 and 38 years old grew by 44% in the last five years to $11,819. In the same period, Generation X saw a growth of 16%. Baby boomers’ personal loan debt only increased by 2%, and the silent generation saw an 8% drop.

Although millennials may be hungry for personal loans, I’ve noticed that they are selective about the source of the loans. Millennials may not trust banks as much as previous generations. According to a 2018 survey by Bank of America (via CB Insights), 73% of those surveyed were more excited about a new financial offering from a tech company like Google, Apple, or Amazon than from their nationwide bank. In contrast, 2013 data from Scratch showed that 71% of millennials surveyed would prefer to visit their dentist than listen to banks. They may be partial to online lenders that provide intuitive interfaces and fast approval (or denial) answers, and that don’t require hours of phone calls and visits to a local branch.

Fintech lenders have changed the way people view personal loans, particularly millennials. Many people are using them to get online funding for home improvement projects, consolidate debt, and finance large purchases.

There may be consequences to this new fast and easy lending experience. The availability and appetite for consumer loans have pushed debt levels among millennials and Generation Z to concerning levels. According to a 2019 report by Northwestern Mutual, millennials carry an average debt of $27,900 — and that doesn’t include mortgages. The oldest Generation Z members are in their mid-20s by many definitions. Yet, they have an average personal debt of $14,700. Based on household debt estimates from the Federal Reserve Bank of New York, these levels of debt among people who are just out of school and working their first job were probably rarer 30 years ago. Now having large amounts of debt at a young age is the new normal.

Fintech companies may be responsible for a big chunk of the debt millennials carry, but they can also help them save and invest money. According to a 2020 personal loan industry study from my company, which analyzed tens of thousands of loan applications my company processed in 2019, the most common reason borrowers get a personal loan (35% of approved loans) is for debt consolidation. When fintech companies execute them successfully, debt consolidation loans can help their borrowers save money by moving high-interest debt into lower-interest loans.

Millennials are also embracing technology-driven investment companies. According to a 2016 report by Global X, a segment of the millennial population the survey calls “adrenaline techies” are 136% more likely than other segments to use roboadvisors and apps instead of financial advisors. It’s no wonder. Roboadvisors may have lower fees and lower minimum investments, which could be appealing for those millennials with lower incomes and savings. Take Betterment, one of the well-known roboadvisors in the industry. According to the company’s website, its average user is 35 years old, and about two-thirds of its customers are millennials.

Fintech companies like Acorns, Stash, and Robinhood are using apps to make investing as easy and seamless as possible. Acorns rounds up the cost of purchases to the nearest dollar and invests the difference. Stash also gives users the option to start investing in more than 400 stocks with fractional shares. Robinhood, on the other hand, allows users to buy and sell stocks, funds, and options without paying fees.

To be successful, I believe fintechs need to offer simpler, faster, cheaper, and more transparent access to financial products. Companies looking to attract a millennial audience and take part in the fintech revolution should think about further improving upon those value propositions — millennials will likely demand it.

The same features that attract millennials to fintech lenders may also attract them to fintech investment and savings companies. From borrowing to budgeting to investing, it is clear the behaviors of millennials and the innovations of fintech companies have had a powerful effect on the way personal finance has taken shape in the 21st century.