We are only just coming out of the last recession, and now we are hurtling into another one at breakneck speed. Countries are going into lockdown one after another, with those that can continue to function with employees working from home, having a distinct advantage over those sectors, such as tourism and hospitality that have been brought to their knees in some places already.
We all know that finance is going to be hugely affected yet again, and with so many people losing employment and therefore their salary, loans are going to be in the spotlight once again. Jeff Kauflin suggests that fintech lenders in the USA may be facing the biggest risks right now, starting with the basic reason — people won’t be able to repay their loans.
Upstart is a fintech-based lender that lends consumers up to $50,000 for purposes ranging from credit card debt consolidation to putting in a new kitchen. However, as the bond-rating agency Kroll reports, “It makes most of its loans to people with below-average credit scores.” Upstart argues that by using alternative data and machine learning to assess risk, it can identify creditworthy borrowers with lower traditional credit scores. It is true that the company has not reported significant defaults over the last year and is in profit, but what will happen to it during a sharp and sudden economic decline?
William Ryan, a managing director at investment bank Compass Point points to the fact that in a crisis, people place repaying personal loans very low on their list of priorities. He says, “People pay their cell phone bills, mortgages, auto loans and credit card bills before personal loans.”
And if the fintechs are not facing defaults, they face is a rapid rise in the cost to fund their loans. Most of them don’t hold banking charters and this means they can’t do what banks do — use customers’ checking accounts to fund loans cheaply. Typically, fintechs borrow from banks to fund their loans and this approach prevents them from holding loans on their own balance sheet, thus reducing their risk.
Another issue the fintechs face is the fact that interest rates for low-grade corporate debt have surged in recent weeks. Together, these factors are already making fintechs lower their growth expectations. Dan Rosen, a founder of fintech-focused venture capital firm Commerce Ventures said: “I was with a bunch of entrepreneurs last week. Most of them had already been having board calls and dramatically changing their plans for originating [new loans].”
The outcome for fintechs depends on the length of a lockdown. Chris Brendler, a senior director of research at CB Insights says that most will be able to survive a one to two-month lockdown, but that if it goes on for three to four months there will be a significant rise in unemployment, as well as