The LendTech Collective
Insights to stay ahead!
Bimonthly Newsletter | Sep 2022 | Issue 120
Featuring
- Navigating Inflation – challenges and opportunities to Fintech firms
- How does digital transformation make way for a fabulous customer experience?
- In the News
- Major Events
Focus On
Navigating Inflation – challenges and opportunities to Fintech firms
The world is staring at an economic downturn due to the severe health and financial shocks inflicted by the pandemic and the massive economic disruptions triggering the Russia-Ukraine war. The current economic scenario has the potential to send some FinTech’s into hypergrowth and others into ruin. Global inflation is continuing to rise, but what does this mean for FinTech’s?
Traversing through an inflation
Several countries are now going through what the experts call – stagflation, which is a mix of low growth and high inflation. It can be a mixed bag for fintech companies as they are involved in different activities like lending money, buying equipment, and more. The reality is no one exactly knows how to navigate a modern inflationary environment.
Inflation effect on fintech
Decreased confidence from investors: Fintech companies are ever reliant on investors to grow and expand their businesses. Unfortunately, the risk of inflation will call for bigger demands on investment returns and lower company profit.
Increased borrowing from fintech: With rising costs due to inflation, fintech companies remain essential in providing loan services to small businesses and individuals
Increased spending on equipment: Fintech has been essential in storing and moving money through the technologies and/or infrastructures they develop. Due to current events, however, profits from these services have been affected.
By focusing on fundamentals and drawing the right balance between being conservative and bold, fintech players can cushion the impacts of inflation.
Strategic preparedness to face the storm
Inflation in 2022 has the potential to send a few fintech’s into hypergrowth and others into ruin. Interest rate hikes and the end of quantitative easing are inevitable, as the Federal Reserve has signaled, to combat a 40-year high in inflation. Firms need to Implement a strategy that works to address different economic landscapes. Inflation could lay waste to many fintech’s in 2022 unless they act now.
Moves Fintech’s need to make to prepare for the possible coming storm
Do more than just provide a service: Help your customers achieve positive financial outcomes that outweigh better interest rates. Leveraging personalization, automation, and predictive analytics to help customers be more financially successful will give your firm a competitive advantage than other competing banks and fintech’s. Shortcutting the laborious processes of opening accounts or applying for loans is also a huge selling point.
To be cautious and invest in long-term fraud control measures: An economic downturn invariably leads to an increase in NPAs. With a jump in the number of defaulters, fraudulent transactions and suspicious activities become prevalent. Investment in long-term fraud control measures is a must during an inflation.
Tap the un-banked sector: During an economic depression, large banks lend only to customers with high credit scores. Fintechs can aim at the underbanked community and get the lion’s market share.
Exploit the possibility of new acquisitions: Firms which are not adequately capitalized come under significant cash pressures and become available for a takeover. Exploiting the opportunity and acquiring those businesses can provide an inorganic boost to the top line and access to new proprietary data.
Globalize the workforce: Inflation concerns are localized to few countries. Hire the workforce in less expensive areas of the country.
There is both an ocean of opportunity for the industry and some challenges ahead. With the current crisis, the future and sustainability of fintech are reliant on its response, especially for smaller fintech firms that would have to push for continued innovation amid rising costs. While a recession is always perceived as unfortunate for the larger market, by addressing the challenges at hand and exploring newer possibilities, fintech players can do well for themselves and the economy.
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How digital transformation make way for fabulous customer experience?
Customer experience is critical to any business. Many companies across the globe, often aren’t putting customers at the center of their ventures. Instead, they are using new technologies to create operational efficiencies and in turn, reduce costs. But, when we think about how to approach customer experience and how to change it, first and foremost we need to have a clear view of what matters to the customers and what doesn’t. The recent economic downturn due to the severe health and financial shocks inflicted by the pandemic and the massive economic disruptions is forcing businesses to rethink the core competencies of customer experience.
The picture is not very different when it comes to the lending industry. Now, low rates are not enough for lending firms/ banks to attract clients or, more importantly, retain them. So, they must personalize their customer journey at all stages, and that includes every step from initial interaction to onboarding to loan origination and more.
How can businesses successfully transform their customer experience to get results?
Today’s tech-savvy customers expect to provide access to funds anytime, anywhere. Customers have no patience for hours of time-consuming and lengthy processes. Many lending firms are still supported by legacy back-end systems built several decades ago. These systems have resulted in inefficient manual and paper-based processes, significantly affecting the consumer experience. Lenders can improve customer loyalty and fuel growth by offering services beyond traditional coverage and focusing on digitization. Digitization fulfills the customers’ need for convenience, at the same time offering lending firms many new opportunities for growth, both top line, and bottom line.
Digital lending isn’t just doing the same thing in a better way, but rather creating something new. It implies an end-to-end process of developing and delivering data-driven financial products that are applied for, disbursed, and managed through the digital channel.
There are 3 steps in which digital transformation needs to happen to impact the customer journey in a positive way.
Onboarding: This is the first encounter the client has with the lenders. Businesses looking to improve customer experience during the first interaction should consider collecting data and documents in digital format
Communications: Customer expectations are changing rapidly, and they expect to be able to transact digitally on any device and the experience to be connected across all channels. Implementing an effective omnichannel strategy is a powerful weapon for lenders to win customers who demand convenience and simplicity irrespective of the kind of electronic devices or physical channels they use. Loan origination solutions must support the ability of the users to switch methods of engagement, whether on a mobile device, online or in a branch. The look and feel of the process should be the same, regardless of the channel. Firms need to introduce a single platform that manages most (if not all) of the channels
Personalization: Today’s customers actively look for relevant inputs that might either improve their financial health or help them make smarter decisions, causing wellness programs for finance and financial management tools to increase in popularity. The importance of user-centric design thinking has inspired groups of lenders to utilize digital platforms and change the digital customer experience. This has led to the integration of data sources to reduce documentation, personalize pricing, and make the overall process experience more effective. In fact, lenders are now using digital tools to unlock varied forms of customer interactions and services previously not accessible to borrowers. Customer data, combined with machine learning, helps personalize the offerings and delivers effective customer-centric communication at the right time. Data-driven AI applications will speed up online lending. AI analyzes and authenticates users’ transactional data. The income verification and spend analysis help highlight risk factors used for a richer credit scoring experience. This will reduce the risk of default and increase borrowers’ financial profiling.
Clients – Lenders most valuable portfolio
Truly understanding customer needs may help lending firms improve not only the buying experience but also their bottom line. In an environment that becomes increasingly globally competitive, service quality is an important measure of customer satisfaction, which ultimately leads to customer loyalty. Today’s customer has zillions of alternatives, and bad customer experiences will certainly make him switch to better avenues to serve his needs. Hence, retaining your loyal customers and attracting new customers can only be possible by providing seamless and personalized experiences, and making them a top priority every time. The need for an intuitive, frictionless digital borrower experience is increasingly becoming the key to lenders’ success.
By developing digital banking, you can potentially expand your business, likely increase the number of customers who will stay with you, and help ensure your business is profitable long-term.
Insight Consultants prioritize customer experience along with operational excellence, to ensure that the customers will enjoy their interactions with the lender across their journey. We have proven methodologies and experience to achieve measurable, sustainable results while mitigating risk. Our objective is to help our clients make the right investment decisions, both for dollars and efforts. With global lending subject-matter expertise, cross-disciplinary service offerings, and insight into solution options complemented by strong vendor relationships, our Business Consulting and Technology teams have the necessary experience and know-how to guide lenders through their journey. We look forward to the opportunity to share additional insights and experiences with you.
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In the News
Fintech firm Klarna reports triple loss
Fintech firm Klarna’s losses triple after aggressive U.S. expansion and mass layoffs. Klarna reported a pre-tax loss of nearly 6.2 billion Swedish krona in the first half of 2022, up from 1.8 billion krona in the same period a year ago. The firm, which allows users to spread the cost of purchases over interest-free installments, saw a jump in operating expenses and defaults. The company’s ballooning losses highlight the price of its rapid expansion in the wake of the Covid-19 pandemic.
The company, which allows users to spread the cost of purchases over interest-free installments, saw a jump in operating expenses and defaults. Operating expenses before credit losses came in at 10.8 billion Swedish krona, up from 6.3 billion krona year-over-year, driven by administrative costs related to its rapid international expansion in countries like the U.S. Credit losses, meanwhile, rose more than 50% to 2.9 billion Swedish krona.
The company’s ballooning losses highlight the price of its rapid expansion after the onset of the Covid-19 pandemic. Klarna has entered 11 new markets since the start of 2020, and took a number of costly gambits to extend its foothold in the U.S. and Britain.
In the U.S., Klarna has spent heavily on marketing and user acquisition to chip away at Affirm, its main rival stateside. The sharp discount reflected grim sentiment among investors in fintech in both the public and private markets, with publicly listed fintech Affirm having lost about three quarters of its market value since the start of 2022.
“We’ve had to make some tough decisions, ensuring we have the right people, in the right place, focused on business priorities that will accelerate us back to profitability while supporting consumers and retailers through a more difficult economic period,” said Sebastian Siemiatkowski, CEO and co-founder of Klarna.
Consumer lenders see unexpected bonanza as people battle inflation
Demand for consumer credit surges as the impact of interest rate increases and inflation hikes people’s cost of living. One in three personal loan borrowers say they need the money to supplement lost income, which raises the question of a ‘debt hangover’ to come.
Additional data shows a significant minority of U.S. consumers is drawing down their savings accounts while a larger portion of Americans is adding to their savings.
Inflation has hit many people hard in the wallet and rising interest rates are causing pain, acknowledges Michele Raneri, Vice President of U.S. Research and Consulting at TransUnion. This has hurt some official measures of consumer confidence. But Raneri suggests that the rate of people quitting jobs to go to new jobs remains relatively high, and that should be considered.Many people are borrowing, some — especially Generation Zers with new credit cards — for the first time of significance in their adult lives. The growth in credit cards and unsecured personal loans in part comes from lenders more frequently making such credit available to non-prime consumers.
Everything on the credit side of consumer lending indicates that banks and other lenders still have a green light to continue lending and growing outstandings. The yellow lights that exist concern the macroeconomic factors like jobs growth — which is slowing — that set the overall terms for borrowing.
Credit card lending also keeps growing. Balances grew 51.7% year over year among subprime credit card holders, which TransUnion says is a record increase. Average credit lines for all credit tiers stayed below pre-pandemic levels. However, super-prime cardholders set an all-time high for credit limits.
Fintech lenders reinvigorated the personal loan business in recent years by making it a more convenient option. Today unsecured personal loans are seen as close as your keyboard or mobile device. The sector overall saw strong growth year over year in the second quarter, according to TransUnion’s figures. Total personal loan balances hit $192 billion, up 31% from the previous year. There were extreme differences here: Subprime borrowers’ outstanding balances almost doubled, while super-prime borrowers’ outstandings rose by 10%. Growth by sheer number of personal loans is more dramatic. In the first quarter (this data is also measured in arrears by TransUnion) originations increased by 60%, with every credit tier increasing by at least 20%
Powell sees pain ahead as Fed sticks to the fast lane to beat inflation
Americans are headed for a painful period of slow economic growth and possibly rising joblessness as the Federal Reserve raises interest rates to fight high inflation, U.S. central bank chief Jerome Powell warned in his bluntest language yet about what is in store for the world’s biggest economy.
In a speech kicking off the Jackson Hole central banking conference in Wyoming, Powell said the Fed will raise rates as high as needed to restrict growth, and would keep them there “for some time” to bring down inflation that is running at more than three times the Fed’s 2% goal.
“Reducing inflation is likely to require a sustained period of below-trend growth,” Powell said. “While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.”
As that pain increases, Powell said, people should not expect the Fed to dial back its monetary policy quickly until the inflation problem is fixed.
Some investors anticipate the Fed will flinch if unemployment rises too fast, with some even penciling in interest rate cuts next year. To the contrary, Powell and other policymakers are signaling that even a recession would not budge them if inflation is not convincingly heading back to the Fed’s target. Powell gave no indication on Friday of how high rates might rise before the Fed is finished, only that they will go as high as needed.
“The historical record cautions strongly against prematurely loosening policy,” Powell said. “We must keep at it until the job is done. History shows that the employment costs of bringing down inflation are likely to increase with delay.”
Underscoring the same “raise-and-hold” message on interest rates, Atlanta Fed President Raphael Bostic told Bloomberg TV that once the central bank’s policy rate is 100 to 125 basis points higher than the current 2.25%-2.50% range, “we should stay there for a long time.”
Powell delivered his speech to a roomful of international policymakers and economists gathered at a mountain lodge to discuss how the COVID-19 pandemic put new constraints on the world economy, and the implications of that for central banks.
Inflation is now their chief concern, and Powell’s remarks at the symposium, hosted by the Kansas City Fed, set a tone likely to register on global markets. It also dovetailed with the message being preached by other major central banks:higher interest rates are meant to slow economies and the commitment to raise them won’t waiver until inflation falls.
Events
Money 20/20
23-26, October 2022, The Venetian,
Las Vegas, Nevada.
