Regulators should take a closer look at the booming business of fintech lending and the increased bad debt on the books of non-bank lenders that has come with it, say those who monitor the industry.

On Wednesday, The Logic reported that the loan books of five Canadian publicly traded fintech lenders—Shopify, Lightspeed, Goeasy, Propel Holdings and Mogo—have grown considerably over the past year. Their bad debts have increased as well, raising questions about what would happen to the companies, their business and consumer clients, and the broader financial system in the event of an economic shock.

Non-bank lenders face significantly less oversight than banks, which are governed by federal legislation and stewarded by the Office of the Superintendent of Financial Institutions and other agencies. Banks abide by stringent rules about disclosures, and about how much money they must hold in reserve. Fintech lending, on the other hand, is mostly regulated by consumer legislation in the provinces, only some of which require private lenders to obtain licences.

Michael Imerman, a finance professor at the University of California, Irvine, and co-author of the forthcoming book The Economics of FinTech, said there are no good statistics about the size of the non-bank fintech loan sector, but “it definitely is large enough where I think regulators should be concerned.” Everyone from merchants to consumers to institutional investors would be affected by the failure of a large fintech lender like Shopify, he said—“this represents a new type of systemic risk.”

Years of high interest rates have made it more challenging for banks and consumers to qualify for bank loans. Companies like Shopify and Lightspeed have taken advantage of that credit gap to expand their loan offerings to the businesses that make up their customer base. Companies like Goeasy, Propel and Mogo have stepped in to make high-rate loans available to consumers who don’t have the credit scores to qualify with traditional financial institutions.

An advantage fintech lenders have over banks is access to non-traditional sources of data that help them assess creditworthiness. Propel, for example, touts its artificial intelligence models that help it decide who to lend to, while Shopify and Lightspeed have in-depth sales and other data that helps them gauge how likely their customers would be to pay back their loans.

Fintechs are “able to recognize changes in consumer credit more quickly than some of the larger banks, and they’re able to adjust their underwriting,” said Scott Buck, an analyst at New York City investment bank H.C. Wainwright who covers Mogo. “These guys have much more flexibility than the large banks.”

But because this type of risk assessment is new and fintechs don’t have the same disclosure requirements as banks, shareholders and customers have little ability to assess whether fintech lenders are being responsible, said Imerman. “It’s very hard to disentangle whether or not it’s prudent risk management,” he said.

Clarisse N’kaa, a lawyer with the Montreal-based consumer advocacy group Option consommateurs, has studied buy-now, pay-later programs, a type of fintech lending. Her research found not all fintech companies had registered as lenders and their contracts often contained confusing language about fees, what happens if borrowers miss a payment and even whether the product is a loan at all.

Regulators around the world are considering implementing new regulatory regimes for fintech lending, but in the meantime, governments should enforce the current laws, she said. “While we’re debating what to do, those loans are still out there. The consumer is not protected,” she said. 

Shopify did not respond to a request for comment and Goeasy declined to comment. In an email, Propel spokesperson Lindsay Finneran-Gingras said the company’s founders “were deliberate in building a leading fintech that set the standard for regulatory compliance and transparency.” In emails, Lightspeed spokesperson Elizabeth McPhedran and Craig Armitage, a public relations professional representing Mogo, said those companies do not have a direct response to those raising alarms about the risks of fintech lending and its regulation.

Andrew Graham, CEO of Toronto-based fintech Borrowell, which offers an online marketplace for loans, said in an email that “lending in Canada is already highly regulated—which is as it should be.” He objected to one method the government is using to crack down on non-bank lenders: lowering the annual rate of interest at which charging it becomes a criminal offence to 35 per cent from 48, announced in the March 2023 budget.

“It would be far better to strengthen consumer protection laws, which already exist, to make lending work better for Canadians,” he said. “Trying to outlaw lenders with the Criminal Code isn’t the way to do it.”