Generational Shifts in Lending and the Emergence of FinTechs in Canada

The TransUnion Canada Industry Insights Report for the second quarter (Q2) of 2019 shows that the Canadian consumer credit market continues to grow, albeit more slowly than previous quarters. The rise of Millennials as a growing part of the credit market is having a significant impact on the marketing and service strategies of lenders — particularly in light of the growing participation of FinTechs in the market. Origination volumes for mortgages are down from the same period a year ago, although co-borrowing in this category is increasing.

Canadian consumers are building (and managing) debt

Supported by an environment of low unemployment and with interest rates being relatively stable, consumers continue to build debt, particularly on auto and installment loans.

Overall consumer credit balances in Canada are up 4.3% from the same period a year ago and total outstanding consumer credit is $1.88 trillion. The number of consumers with access to credit is also up: 1.7% year-on-year.

So far, consumers are generally managing their debt levels well, as delinquency rates have remained stable over the last year. However, they will need to be extra diligent to manage debt obligations in the event of an economic downturn

Parallel trends: Millennial debt and FinTech lending

As their borrowing requirements evolve to reflect changes in their life circumstances, Millennials have caught up with Baby Boomers in terms of outstanding debt¹. Each generation now has just over $500 billion of debt. For Millennials, total balances were up 12.33% year-on-year, while Baby Boomers saw a drop of 1.80%. Millennials are now second to Generation X in having the highest outstanding credit balances. Consumers in Millennial and Gen Z segments are also taking on more installment loans, while the rate of loans issued to older consumers has declined.

At the same time, we’re seeing greater participation of online-only FinTechs, which tend to focus on personal installment loans. The fast turnaround times and positive customer experience they offer is attractive to younger consumers looking for personal loans. For traditional lenders (major banks and credit unions), installment loan originations were flat year-on-year, while FinTechs saw a 34% increase (although their overall volumes are still relatively small).

The fundamental shift in generational lending that we’re seeing will drive banks and other lenders to adapt to the needs of younger generations, and provide more options and tailored customer experiences for consumers in these age groups.

Uptick in mortgage co-borrowing

While many factors affect the mortgage market, it’s clear that the regulatory changes made early in 2018 have had a material impact. Mortgage originations are down 8.9% year-on-year, and seem to be affecting younger consumers the most: originations were down 13.4% year-on-year for those aged 18 to 25, most likely because relatively lower incomes limit their ability to qualify under the mortgage stress test rules. Many younger consumers have effectively been priced out of major Canadian housing markets.

A possibly unintended consequence of the new rules is an increase in co-borrowing — multiple consumers combining the power of their salaries to apply for a mortgage loan together. Although this is nothing new, it’s not only partners and spouses but also parents, relatives and friends who are helping each other get a foot on the property ladder.

While the Canadian consumer credit market remains generally resilient, a downturn in economic growth will put pressure on consumers and may affect delinquency rates, especially in more vulnerable regions of the country.