How Can Fintechs Keep Growing Today?

Printed charts next to a laptop and notebook.

In our last post on fintech opportunities, we talked about how much of the success of the fintech industry has depended on two areas where fintechs excel: finding a new credit population and creating distribution and other partnerships. But there’s one other key factor we left out in our last post: investors. 

In the last 90 days, the credit market has shifted. Now, the ability to tap a new and unique credit population may present a challenge. Of course, this doesn’t mean that fintechs should stop searching for and allowing for unique attributes within their credit models. But it does mean that many firms need to do a few other things better. 

Before we get into the improvements, let’s review the historical relationship between fintechs, investors, and credit attributes.

Data-Hungry Fintechs Fueled Industry Growth

The big win for fintechs has been the size of their credit buy box. Data-hungry, analytical founders may see traditional lenders as old-school in this regard: they use traditional bureau scores and cut-off guardrails, they often verify employment, and they fund their loans with deposits.

Through that lens, fintechs have often developed a larger buy box. They’ve pulled in added credit and repayment attributes, built advanced models to forecast loss rates, and charged enough interest to compensate for those losses. That can give them larger margins than the traditional lenders whose approach they’re rebelling against.

And those larger margins often draw private investors. No funding with deposits! 

Fintechs can fund their loans through private equity and securitizations because those sophisticated investors understand and are receptive to a business model that leverages highly advanced underwriting models — the kind that are driving their unsecured lending and buy now, pay later expansion. With that funding, fintechs have gone from rebellious ideas to 10 percent of the unsecured and auto lending markets.

What are Investors Doing Now?

In the last 90 days, the world has changed. Today, many fintech investors may be operating on the tougher end of the credit spectrum and are seeing their credit models stress-tested for the first time. Whether they are direct investors or participating in securitized offerings, today, many innovative investors are taking a pause on buying.

And what does that mean for fintechs?

Many fintechs are looking to court more traditional investors to sell their paper. In doing so, they run up against the same issues they were trying to solve: the creative data attributes don’t appeal to many traditional investors in the same way that they don’t appeal to traditional lenders. 

If they want to sell and generate a steady flow of funding for future loans, they have to sell at a lower price — or not at all. Regulatory pressures have made everyone uncertain of how they’ll fit different loan types into the context of their portfolios. 

It is as if the risk fintechs took in order to succeed has come to call: a bigger credit buy box may not serve you in every economic condition. Though their models are largely operating within expected tolerances, investors, not knowing where the economy is going, aren’t taking those big risks anymore — or any risks at all. 

In these new conditions, fintechs need to innovate again. It’s time to consider the improvements we mentioned way back at the beginning of this post. 

Improve Backend Servicing to Keep Growing

While funding sources are shifting, fintech growth as a percent of the overall lending market hasn’t stopped. But those high margins and those sometimes risky assets can hold fintechs back if they don’t pay attention to how they service and collect on their loans

Like many industries, fintech has a customer-data aggregation problem they haven’t solved for. Because they’ve built so rapidly and been so aggressive in forming partnerships, the number of possible channels and touchpoints for their brand — and for the loan itself — has easily ballooned. To track risk expression or payment cues through those touchpoints is a tall order. 

Even more so because servicing often falls to outsourced partners. 

But as we discussed in this post, outsourcing can make the already difficult task of aggregating data that much more difficult. That’s not to say you shouldn’t outsource those people centers. The innovative fintechs will consider implementing or recommending stronger cross-channel insights and reporting to keep those outsourced servicing partners on track — not only with loan servicing and collection, but also with compliance regulations and customer experiences. 

Want to learn more about how to improve? Reach out to our team through the link below. We’re ready to talk about everything that interaction analytics can do for fintech.

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Brian Reed

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