A Hard, but Useful, Lesson to Learn
Why fintechs with finance failure experience will fare better during a recession
In the years since the 2008 crash, much has happened to make finance safer and more stable. New rules and regulations have been put into place, banks have been cushioned with capital and compliance has risen up the agenda. Alongside these developments, change has come in the form of fintechs—companies using technology to cut costs and improve quality of financial services. These fintechs have benefitted from being created during a period of economic growth, and consumers as well as business, have benefitted from access to more choice.
But there are clouds on the horizon. Concerns of an economic downturn are growing. In the very near future, fintechs could deal with conditions considerably different from the ones they emerged in.
The fintech lenders, dependent on credit from investors or individuals, could be hit hard. For one, raising capital would become more challenging. But there are also concerns over how the loan books would withstand the stress of borrowers being unable to repay their loans. Industry default rates are currently suggested to be around 1%-3%. These could increase during a recession, testing the credit and risk assessment models built by the different platforms, and potentially exposing lenders to capital losses.
So what will determine how fintech lenders will fare during a recession?
During the decade before the 2008 crisis took off, I saw first-hand the characteristics that can contribute to success of failure. I’ve carried the learnings from this experience with me as I moved on to ABN AMRO, ING and now online lender Spotcap.
Here are three key takeaways that have stayed with me:
First, when the economy is doing well, there is more room for inefficiencies. However, as investments and spending slows down, the shake-out always inevitably comes. The most efficient providers with the best product will come out on top.
Second, greed is not good. Every business should focus on growth and maximising revenue, but the drive for more users and revenues can’t come at the cost of proper underwriting and risk assessment. The lenders that have compromised in these areas will be the first ones to struggle during a downturn.
Third, experience matters. Fintechs with teams that have been through credit cycles and that are aware of systematic risks are more likely to have built businesses that can withstand an economic downturn. They are also more inclined to focus on upholding the highest regulatory and reporting standards. But perhaps most importantly, they realise the value of a business that takes risk management seriously and build in checks to assure partners that they are making considered decisions when it comes to credit and risk.
Fintech lenders have yet to be properly tested in a downturn. A slowing global economy will bring winners and losers. Experience and a healthy view of how to balance risk vs. revenue will be an asset. While an economic downturn will bring challenges for fintech firms in terms of slowing investment, it will also help the fintech industry evolve to its next phase. The fintechs that don’t get weeded out or snapped up will emerge stronger with proven businesses. I can get behind that.
Niels Turfboer is managing director at Spotcap, find out more on https://www.spotcap.co.uk/.
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