Rising interest rates caused by recent inflation may hurt traditional lenders, but some tech-powered financial firms are seeing tailwinds.
Tony HuangCEO of Seattle consumer finance startup Possibility of financing, said his company’s business is expected to grow this year. As the government slows spending — and the prices of everyday goods rise — there’s a greater need for consumer credit from lower-income Americans, Huang told GeekWire.
“People tend to think that consumer finance companies are very sensitive to changes in interest rates,” Huang said, adding that Possible isn’t because it’s relatively “up to date.” recession proof.
The startup, which offers small loans for a fixed monthly fee, is relatively immune to rising interest rates, Huang said. Indeed, the company is accustomed to incurring high costs and losses, while other lenders operate with relatively low margins.
As other lenders tighten their lending, these potential customers are “flowing downstream” to Possible and other alternative credit services. This lowers its customer acquisition costs and provides an influx of new, higher-quality users, Huang said.
To date, the startup has issued over 1.65 million loans to over 500,000 US customers and raised $45 million in total funding. He is always working towards profitability.
loan club, a San Francisco-based digital lender, has also set itself a steady performance during the economic downturn. The public company’s previous business model was to facilitate peer-to-peer transactions, but after acquiring Radius Bank and securing a bank charterhe now has some control over his sources of capital and collects interest on loans, providing a ‘buffer’ during the economic downturn, the chief financial officer said Tom Casey.
Lending Club, which serves more than four million members, predicted earlier in the year that financial markets would continue to be “pretty choppy”, and that “turned out to be the case”, Casey said.
“It’s a fundamental test of why we became a bank,” he added. “And we are already seeing the benefits of that as we navigate these unprecedented times.”
Meanwhile, other fintech startups saw their valuations plummet over the year, part of the broader market downturn. A report by venture capital firm Andreessen Horowitz said estimated valuations of private fintech companies have fallen significantly since October 2021, having increased more than sixfold.
Perhaps the companies most affected by rising interest rates are those that buy now, pay later, or BNPL. These companies split the initial purchase cost into additional payments, often with little or no interest.
However, with rising rates, their already thin margins could be squeezed even further, according to a report by Tellimer said. BNPL startups often charge the merchant, not the buyer, for these small loans. Therefore, if merchants are unwilling to increase the fees they pay BNPL companies to provide a pay-later function on their e-commerce site, it is the BNPL companies’ margins that will erode, the report adds. .
On top of that, tech juggernaut Apple recently announcement it will be a competitor in the space with its own BNPL service dubbed “Apple Pay Later”.
Investors have already soured on the idea of many BNPL companies.
Affirm, for example, has seen its stock price drop more than 80% since the start of the year. The company recently partnered with Amazon to offer loan options for purchases of $50 or more on the platform, and faces the possibility of extensions headwinds due to the rising cost of capital.
Swedish company BNPL Klarna was also hammered. Its valuation has reportedly been cut to $15 billion after previously raising $45.6 billion, according to the Wall Street Journal. reported.