Tight Credit Market Creates ‘Goldilocks Scenario’ for Alternative Lenders

The traditional credit supply chain is showing signs of strain, leaving millions of consumers seeking alternatives to conventional banking products and opening new avenues for technologically driven lenders.

Mainstream banks and credit unions are re-examining their underwriting standards across consumer and commercial lending.

As Clive Kinross, CEO of FinTech Propel Holdings, told PYMNTS CEO Karen Webster, the credit pipeline is about “as tight as it’s been over the last 10 years.” Tariff-related macro uncertainty means that consumers who would otherwise qualify for mainstream credit are now finding themselves in different segments of the market.

The Federal Reserve Bank of New York reported in May that late-stage delinquencies on revolving debt surged year over year. Household debt reached $18.2 trillion in the first quarter, increasing by $167 billion, a 0.9% rise from Q4 2024 and a 2.9% year-over-year increase. This marked the lowest annual growth rate since Q1 2021.

For companies like Propel Holdings, which specialize in providing alternative access to credit for underserved consumers, this shift presents an opportunity to serve individuals often overlooked by traditional institutions.

“There’s a big distinction between riskier consumers and risky business,” Kinross said.

This perspective challenges the conventional banking view that lending to underbanked populations constitutes a high-risk business model. Instead, it’s about having the right tools and processes, particularly using technology like artificial intelligence, to understand and price risk accordingly, he said.

A key component of Propel’s strategy and growth is its proprietary technology platform with AI underpinning. The platform enables cash flow underwriting, allowing the company to assess creditworthiness using consumer-specific data points rather than solely relying on traditional credit scores. This AI-powered approach is central to the company’s ability to make credit decisions for potentially 80,000 to 90,000 consumers daily, with decisions rendered within five or six seconds.

The underbanked population that is, in turn, underserved by banks represents anywhere from 35% to 50% of the total population, Kinross said. These individuals would typically resort to less favorable options like payday loans in the absence of viable alternatives.

Propel aims to offer “vastly superior credit” to these consumers, he said.

The typical Propel customer tends to fit into the demographic of an older millennial or younger Generation X, generally aged 35 to 54. The primary product offered by Propel is a line of credit.

The average credit limit ranges between $2,000 and $3,000, and consumers typically draw down around 70% of this limit, resulting in an average credit outstanding of approximately $1,800.

Market by Market

Propel operates in three markets, including the United States, the United Kingdom and Canada. The U.S. market constitutes roughly 90% of Propel’s business, the U.K. accounts for about 8%, and the Canadian market represents a smaller portion, around 2%.

Macroeconomic indicators such as the unemployment rate and wage inflation relative to the consumer price index (CPI) play a role in the performance observed in each market. The U.S. market, with unemployment around 4.2% and wage inflation outpacing CPI, shows a “very strong consumer,” Kinross said.

When overall sentiment is down, consumers tend to pull back on spending and save more. Coupled with relatively stable employment (particularly in the U.S.), this behavior has led to consumers being able to pay down their loans better than would otherwise be the case.

Similarly, the U.K., with slightly higher unemployment but strong Q1 growth, also demonstrates robust demand and credit performance.

Canada, however, shows a “slightly more bruised Canadian consumer” due to a materially higher unemployment rate (6.9%) and factors like tariffs, where the macro volatility has been more pronounced, Kinross said. Propel’s latest quarterly earnings results demonstrate the “best credit performance… across the board since being a public company,” a trend that continues into Q2.

Kinross described the current environment, with a steady uptick in unemployment but not a sudden spike, as a “Goldilocks scenario” for Propel’s business within the context of its consumers, as it drives more qualified consumers into its segment.

Even if unemployment rates continue to tick up steadily, the open number of jobs, particularly for Propel’s segment, remains strong, which is an important variable in how quickly a consumer could find another job if they lose one, he said.

Lending as a Service

Propel is also exploring expansion through its lending as a service (LaaS) offering. This B2B play allows Propel to partner with other institutions or debt funds, particularly enabling access to what Kinross called the “lower APR markets” where loan sizes are typically higher, and capital requirements are substantial.

Through LaaS, Propel provides a range of services — underwriting expertise, marketing and servicing — using its technology platform.

“From our perspective, it’s obviously a balance-sheet-light business,” Kinross said.

In this model, Propel doesn’t use its own balance sheet or take the economic risk of the loans while enabling partners to gain exposure to the underbanked segment or operate in jurisdictions with specific regulatory requirements. This capability also allows Propel to roll out its products in more jurisdictions where state regulations might mandate a different structure for loan ownership.

Kinross said he believes there is an opportunity for traditional banks to engage with the underbanked market. Banks first need a mindset shift, recognizing that these consumers “deserve access to credit. While banks typically lack the systems, underwriting expertise and culture to serve this “high-touch” segment directly, they can collaborate with companies like Propel.

A collaboration could take several forms, from banks providing access to less expensive debt capital (which could lower costs for consumers) to partnering directly on lending products. Propel has a partnership with Koho, a Canadian neobank that had a large customer base but no lending product for this segment, and Kinross said Propel now provides the lending product.

An appealing aspect for banks is that Propel’s consumers don’t remain underbanked indefinitely; they often graduate to mainstream banking over time, presenting a long-term customer acquisition opportunity for banks that engage with them earlier in their financial journey, Kinross said.

“Consumers are very savvy and understand the relationship that their credit score has to what’s available to them,” Kinross said, adding that “they understand the options that are available in the marketplace … when they get offered a loan from Propel, they know it’s better than what’s otherwise available in the marketplace.”