FinTechs in Canada: Old Perceptions and New Possibilities

As FinTechs continue to rise in prominence and popularity, an increasing number of conflicting perceptions have left lenders wondering what is fact — and what is fiction — in this growing industry. Iain Page, Senior Consultant, Analytics Consulting, explores a new TransUnion study into the evolving Canadian FinTech landscape to debunk three commonly held perceptions about FinTech consumers and the credit strategies these organizations employ.

A growing industry

Although FinTechs have existed in the United States for almost a decade, the Canadian FinTech industry (referring to the non-traditional lending industry) is still relatively new. But what started small appears to be growing into an industry filled with possibilities for new and established FinTechs alike.

As the industry continues to grow, so do the myths and misperceptions that go with it. TransUnion Canada recently conducted a new study to identify and analyze some evolving trends around the FinTech lender landscape — specific to Canada. The study findings reveal key insights that seem to debunk myths about who FinTechs service, how they operate and what their strategies are.

Let’s explore three of these perceptions, what the study revealed and what possibilities this new information suggests:

1. FinTech lending is purely for younger consumers

   FinTechs don’t exclusively attract young Canadians: 46% of consumers are over the age of 40.¹

   While many young consumers do prefer the ease and speed of FinTech-based transactions, it’s a common misperception that these institutions are purely focused on Millennials and Gen Zers. Nearly half of Canada’s FinTech consumers are over the age of 40 compared to 53% for more traditional banks.

2. Canadian FinTech lending isn’t limited to a small demographic — they’re lending across all age groups and types of consumers — and the digitalization of the financial services industry is appealing to consumers regardless of age.

   This suggests that Gen Xers are equally attracted to what FinTechs offer, challenging the notion that older consumers engage exclusively in traditional lender relationships.

   Possibility: FinTechs are well-positioned to tailor marketing strategies across all age groups. Those focused solely on younger consumers could benefit from extending their scope to include older generations, adding another differentiating feather in their competitive cap.

3. FinTech lenders cater only to the “unbanked” and “underbanked”

   FinTechs appear to hold a variety of credit lines and are not exclusively catering to the unbanked or underbanked.

3. FinTech loans are issued to a credit-active population which utilizes a variety of products: 51% of FinTech consumers have three or more existing credit products by the time they open their first FinTech account.

   Our study also observed a mix of types of accounts on file: 78% of consumers already had a credit card; 25% already had a line of credit; and 16% already had a mortgage loan when they approached a FinTech.

   Possibility: FinTechs can optimize their marketing and segmentation strategies to cross- and upsell different kinds of products to their customer base and not limit their sales scope to single product lines.

4. FinTechs are more focused on technology than risk management

   This notion appears to ring true, but it doesn’t mean it will be the reality for long.

   FinTechs appear to be targeting riskier consumers than other, more-traditional installment loan lenders; the median consumer score is subprime versus the median consumer score being prime for both banks and non-bank, traditional finance companies. Research suggests FinTechs are focused on technology over risk management, as there’s limited evidence of a risk-based strategy for pricing risk or assigning loan size based on a consumer’s risk profile. In fact, the data appears to show a one-size-fits-all approach is generally being used by FinTechs, with similar loan sizes and interest rates being issued regardless of a consumer’s credit score.

   While there are observed differences between other lenders and FinTechs regarding the application of credit risk to their strategies, this won’t necessarily remain the case over time. What FinTechs gain in agile technology they sometimes lose in effective risk management, while traditional lenders can sacrifice innovation for legacy systems and processes — this presents a possible opportunity for partnership.

   Possibility: FinTechs and traditional lenders can partner to leverage each other’s strengths: gaining a competitive technology advantage while maintaining a robust risk management plan.

Understanding what makes FinTechs tick — especially if you are one

Debunking FinTech notions isn’t just useful for traditional institutions or consumers interested in this exciting space. Many FinTechs can find themselves falling victim to some of these misperceptions and could be limiting potential by using fiction, and not fact, to inform strategies. Whether you’re a traditional lender, a budding FinTech or an alternative financial services provider, make sure you keep an eye out for more FinTech-focused research from TransUnion on the innovation and opportunities of this evolving space.