Where is there room for innovation in consumer lending? It’s a question founders in fintech have been asking for over a decade as the likes of Affirm, Tala, Upstart, and more have looked to fill a role that was traditionally dominated by banks, and later by GSEs.
A recent report from the NY Fed digs into how banks have ceded ground in direct household lending, with their share falling from 50% in 1955 to roughly 30% today. In their place is a more complex and layered system of partnerships and passthroughs. The federal government has also become a much bigger backstop, now underwriting a massive share of mortgages and other consumer loans. In short: Households are increasingly reliant on government policy for credit availability and stability.
Households used to get most of their loans directly from banks, which held the loans on their books; now, many are originated by fintechs or banks and quickly sold to GSEs or securitized. There are pluses and minuses; for example, it’s created more standardized underwriting, which can improve access, but it’s potentially made the system less flexible in crisis.
The old proverb of putting all of one’s eggs in the same basket may apply here, with room for infrastructure innovation in consumer lending (e.g., credit transferability, funding marketplaces), which the fintech sector is primed to build.
Speaking of building, today Peter Renton dives into the state of lending and cash flow underwriting.
–The Editors
