By Anuj Nayar, Financial Health Officer at LendingClub
Deeply woven into the fabric of the United States is the prospect of upward economic mobility and the pursuit of the American Dream. However, U.S. consumers today increasingly feel the American Dream is out of reach due to financial instability. They desperately want financial stability—a healthy goal—but too often find themselves financially unhealthy.
It doesn’t take a microscope to see that our country is sick. Americans owe a record $1.04 trillion in credit card debt—up from less than $854 billion five years ago—and many people are racking up this credit card debt with less than $400 savings. We found that Americans actually rate their financial well-being worse than their mental and physical health.
At LendingClub, we’ve watched unhealthy debt levels rise for the past 11 years and have been steadfastly dedicated to empowering Americans to chip away at it. But we’ve also asked ourselves what more can we be doing to solve this financial health crisis, and help the more than 40,000 Americans who come to us on average daily looking for help.
We’ve made it our mission to provide our members with a path to financial health and the resources to stay on track, as well as to make the personal loan market more accessible to those individuals seeking to improve their financial health. But we know that to do this successfully, it takes more than just good intentions—it requires robust capabilities to manage risk and greater technological efficiencies within our company to give our members the best experience possible. LendingClub is now the largest provider of unsecured personal installment loans in the U.S. and has those capabilities and scale.
LendingClub and other financial technology (fintech) companies have an advantage when it comes to meeting the financial services needs of today’s consumers. We solve the pain points of traditional banking with modern interfaces, faster technology, and the ease and convenience of increased accessibility. According to TransUnion, personal loans are now the fastest growing segment in consumer finance, and it’s fintech companies who facilitate the largest share of unsecured personal loans, at 39% (up from just 7% in 2013).
Fintech companies have grown rapidly in recent years in part because of their ability to increase financial inclusion, and fill the credit gap where traditional financial institutions and banks fall short. We see this every day at LendingClub when we’re able to lend to consumers in areas where banks are pulling back or closing branches.
Financial inclusion for us means finding new and innovative ways to help borrowers whose profile places them outside of the traditional model. When we determine eligibility for a personal loan, we know that a FICO®/credit score alone may not provide a complete picture of a consumer’s creditworthiness. At LendingClub we can go way beyond credit scores and incorporate data such as bank transactions to evidence cash flow while looking at a whole host of other factors that may include income, history, and behavior. We can then incorporate all of this additional data into the underwriting process to potentially offer a better rate than had the underwriting been solely based on a FICO score.
Fintechs are therefore able to help more Americans on their path to financial wellness. Recent data from TransUnion shows that fintech lenders tend to apply the most robust risk-based pricing strategies on unsecured personal installment loans. (See graph below)
The conventional wisdom is that larger bank lenders are better at managing risk than smaller providers. But a recent report from the Federal Reserve Bank of Philadelphia, found that LendingClub’s efficiencies not only outperform other lenders of a similar size ($1 billion–$10 billion in loans) peers, but even surpasses most of the largest bank lenders (consumer lending that exceeds $10 billion).
The report measures lending efficiency as the difference between a bank’s non-performance and best-practice rates. The closer its non-performance rate is to its best-practice rate, the higher the proficiency. The report shows the median excess ratio of the group of the largest banks to be 0.0009—while LendingClub’s is even smaller, at 0.0008. In other words, the report shows that LendingClub’s underwriting proficiency is comparable to that of JP Morgan Chase & Co., Discover, Citigroup, Bank of America, Wells Fargo, and Capital One to name just a few. (See this table for comparisons against the largest bank providers.)
LendingClub exhibits best in class underwriting efficiency, because our platform is able to employ advanced technology, different data sets, and complex algorithms that allows for more precision in pricing credit risk. That is to say, the authors suggest that practically all of the losses LendingClub observed were due to the inherent risk in the population rather than imperfections in the underwriting process. This translates to loans to more consumers at lower prices.
LendingClub is continuously innovating to reach underserved populations while maintaining “best-practice” low loss rates. We’re proud to be making great strides in the consumer lending space, and will continue to offer more Americans a path to financial health. We strive to be more than just a financial institution—we want to be America’s Financial Health Club.
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