WILMINGTON — With economists doubtful that the Federal Reserve will cut interest rates this year and household debt steadily rising, there may be a window of opportunity for fintech companies to gain customers.
In early March, the American Bankers Association’s Economic Advisory Committee predicted that with minimum rate cuts and inflation raging, there could be a deterioration in credit quality, or a person’s ability to repay debts. Credit card debt in particular is at $1.2 trillion, but this panel of chief economists from some of the largest banks in North America believe that delinquency rates will continue to slowly tick up and minimal changes to mortgage rates.
Best Egg has been on the forefront of a demand for personal loans to help consolidate debt. The fintech company started in 2014 by offering loans to near-prime credit rate customers entirely online, using a proprietary algorithm to identify borrowers who were stronger than at first glance. It has since rolled out a credit card, flexible rent program, auto equity loans and financial health tools.
The company may have been meeting the moment better than others. A working paper published by the Philadelphia Federal Reserve found that in 2009, finance companies were 40% of auto loans, while banks and credit unions were the remaining 60%. By 2019, those numbers had flipped.
Alex Rhodes, chief operating officer for Best Egg, said that while his company doesn’t market auto loans through dealers, it could be a sign that companies like Best Egg have found an attractive space that other financial institutions were not meeting. Back in 2014 when the company launched as Marlette Funding, local and national banks were moving away from personal loans, capping and offering strict limits for debt consolidation loans in particular.
“It’s certainly a place where digital experience is superior to highly manual experience, so there’s room for disruption. When our customers come to us, they want a loan to achieve a goal, call it debt consolidation to make a major purchase… historically, customers are around 90% for debt consolidation,” Rhodes said.
When Best Egg launched, it was one of a dozen fintech companies offering this type of loan and it now serves more than a million customers. Today, Rhodes said that the field has gotten more competitive. More banks have opened in the financial space and some have inked partnerships with fintech companies, leveraging the broader base that the traditional banks have to offer a new digital tool.
But other affiliate lenders like Credit Karma and Lending Tree now play a larger role in the lending ecosystem today, offering tools to help compare loan offers to help consumers shop around.
“For consumers looking for a consolidation loan, they needed more available credit and less friction by way of originating a loan, and we felt like we could meaningfully differentiate ourselves by offering a [simple] digital experience,” Rhodes said.
With economists on local and on a national scale reporting warning signs based on trade policy, elevated housing costs and high prices at the grocery store, Rhodes sees that it’s a sign of the times that more people are turning to more flexible options.
“I can tell you where we have seen our ability to manage through upswings and downswings along with our customers is because we’re tied at the hip,” he said. “We listen to our customers, and we try to be on the bleeding edge of what’s going on in the market place to offer that flexibility to help customers bridge the gap.”
“Whether we’re headed to a recession or not, I know that we are well prepared by way of having a strong foundation of flexibility,” Rhodes added.
