The rise of financial technology (fintech) companies is undeniable. In 2014, Lending Club and OnDeck went public, and over 500 fintech startups attracted private financing. In the student loan refinancing market, there has been a rapid expansion of lenders participating in the market over the last 3 years (from two to eleven lenders). There are also competitive loan products being offered by startups, credit unions, and banks alike. Why is this?
One major reason is that entrepreneurs and innovative financial institutions have stopped accepting the idea that personal finance customers value convenience over a competitive offer. Unfortunately for many years, this was not the case. Banks traditionally valued customers at $10,000 or more because they understood that once they got the customer to open an account, often a checking or savings account, they would likely come back for the more lucrative products such as credit cards and mortgage loans. This model worked effectively because going to your local bank was the easiest, most comfortable solution at the time.
The lack of a student loan refinancing market was a prime example of this old attitude. With the one-sized fits all nature of federal student loans and the increased financial stability a borrower has once they graduate and start working, it’s surprising that no financial institutions offered student loan refinance products for both federal and private student loan until 2012.
Fast forward to today, and now a variety of lenders including community banks, credit unions, traditional banks, and alternative lenders have entered the student loan refinancing market. They understand that customers with traditional student loans will refinance if offered a product that helps them achieve their financial goals, usually either lowering their interest rate or monthly payment. This competition has in-turn been great for borrowers. The lowest marketed rate in the industry has dropped by over 100 basis points (to under 2% APR) in the last year. Companies have also started making it even more convenient to receive new offers. Progressive lenders are also becoming more flexible about not asking for arduous personal information from borrowers (such as personal references) before they give out a conditional refinancing offer. Such innovations have undoubtedly helped the conversion rates for lenders and made for easier experiences for customers.
The amazing thing is, this is just the start. More startups, banks with deep pockets, and other lenders will likely enter the student loan refinancing market and many other underserved areas of personal finance now that they understand that customers are up for grabs and willing to choose a compelling product and good customer experience over their existing bank.