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Can Fintechs Win in a High-Interest Rate World?

Economy | Jun 4, 2024

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Can Fintechs Thrive Amidst Rising Rates? Exploring Challenges & New Opportunities

The well-known neobank in the United Kingdom, Monzo, just revealed its first-ever full year profit in 2023 (year end March) £15.4 million as reported in Sifted against the backdrop of rising interest rates, which begs the question 'how profitable fintech companies will be overall in this new climate'?

Higher interest rates can boost revenues of lending-focused fintech models since they can charge more for loans.  However, fintechs that primarily focus on deposit accounts may find the current environment challenging.  Not all fintechs can always keep up with these changes, even while some challenger banks are renowned for providing competitive—or even higher—rates on savings accounts like EQ Bank when compared to traditional banks. For those fintechs that are unable to provide competitive interest on deposits, this may result in a loss of customers.

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Monzo's business strategy is multifaceted and offers loans including a buy-now-pay-later product, as well as debit cards and current accounts, and overall revenues grew to £880 million in 2023, which was more than double the year prior.

Fintechs that concentrate on payments may experience less impact, whereas wealth management platforms may see a rise in investment activity. However, growing borrowing rates may put pressure on some lending-focused fintechs, particularly those that specialize in personal loans.

Managing Credit Risk

Lending-focused fintechs and challenger banks like Monzo, must prepare for higher default rates in a climate of high interest rates, similar to traditional banks. This is because:

  • Borrowing money becomes more expensive when interest rates climb. Borrowers may find it difficult to repay their debts as a result, which could lead to defaults.

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  • When the economy is uncertain, some borrowers borrow more than they can afford, particularly if they think that rising interest rates will increase their future profits. If those expectations are not fulfilled, this may raise the likelihood of defaults.
  • Some fintechs may feel pressured to relax their lending criteria in an effort to draw in more new borrowers as the competition heats up in an environment of high interest rates. This might result in lending money to borrowers who pose a greater risk, which would raise the chance of defaults.

Ways Fintechs can manage the risk of greater defaults in a higher interest rate environment

  • Fintechs can reduce the risk of defaults by closely evaluating their credit underwriting process to ensure suitable creditworthiness and financial history of borrowers.
  • Fintechs can help avoid defaults by closely monitoring loan performance and proactively reaching out to borrowers who are having difficulties with options.
  • One way to lessen the financial impact of defaults is to set aside reserves to cover potential loan losses.
  • Increasing the Variety of Loan Products: Divvying up the risk among other loan categories, such home loans, personal loans, and business loans, can lessen the impact of defaults in any one area.

Be Adaptable While Putting Customers First

  • The environment of high interest rates presents opportunities as well as challenges for the fintech sector. If fintech companies can adapt their business plans to capitalize on their unique advantages, and prioritize client needs, they have a good chance of succeeding.

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  • Fintechs can enter niche markets where traditional banks are not be as competitive, such as microlending to underbanked populations or providing alternative investment options to clients seeking higher returns.
  • Fintech businesses are well known for their flexibility and ability to create innovative financial products. With this advantage, businesses can develop solutions that are appropriate for the current high interest rate market, such as robo-advisor platforms that automatically adjust investment plans in response to fluctuating interest rates or peer-to-peer lending platforms that provide lenders and borrowers competitive rates.

Conclusion

By prioritizing customer needs, remaining adaptable, and managing credit risk, fintechs can continue to drive innovative and inclusive financial products in the current high interest rate landscape.


NCFA Jan 2018 resize - Can Fintechs Win in a High-Interest Rate World?The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, artificial intelligence, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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