The recent rise in interest rates caused by inflation may harm the interests of traditional lenders, but some technology driven financial companies are seeing a smooth ride.
Tonyhuang, chief executive of possible finance, a consumer credit start-up in Seattle, said his company’s business is expected to grow this year. Huang told geekwire that low-income Americans need consumer credit more as government spending slows and the price of daily necessities rises.
“People tend to think that the consumer credit business is highly sensitive to changes in interest rates,” Huang said, adding that this is not the case because it is relatively “unaffected by the recession.”
Huang said that the small loans provided by the start-up company at a fixed monthly fee have relatively nothing to do with the rising interest rates. This is because the company is used to bearing high costs and losses, while other lenders’ profit margins are relatively low.
Although other lenders tightened their lending, these potential customers “flowed downstream” to possible alternative credit services. Huang said that this has reduced its customer acquisition costs and provided a large number of high-quality new users.
So far, the startup has provided 1.65 million loans to more than 500000 American customers and raised a total of $45million. It is still trying to make money.
Lending club, a San Francisco based digital lending institution, is also preparing for its stable performance in the economic downturn. The old business model of the listed company was to promote point-to-point transactions, but tomcasey, the chief financial officer, said that after acquiring radius bank and obtaining a banking license, the company now has a certain control over its capital source and collects loan interest to provide a “buffer” during the economic downturn.
Casey said that the loan club, which serves more than 4 million members, predicted earlier this year that the financial market would continue to be “quite volatile”, which “has proved to be true”.
“This is a fundamental test of why we became a bank,” he added. “As we go through this unprecedented era, we have seen the benefits of this.”
Meanwhile, valuations of other fintech start-ups have fallen sharply this year, as part of a larger market downturn. A report by andreessenhorowitz, a venture capital firm, said that since October 2021, the valuation of private fintech companies has fallen sharply, by more than six times.
“Pay as you go” or the so-called bnpl company may be most affected by the rise in interest rates. These companies divide the initial cost of the purchase into incremental payments, usually with little or no interest.
However, a report by tellimer said that as interest rates rise, their already meagre profit margins may be further squeezed. Bnpl startups often charge merchants for small loans rather than buyers. Therefore, the report adds that bnpl’s profits will be eroded if merchants are not willing to increase the fees paid to bnpl in order to provide post payment functions on their e-commerce websites.
Most importantly, technology giant Apple recently announced that it will become a competitor in this field through its bnpl service “Apple pay later”
Investors have been dissatisfied with the ideas of many bnpl companies.
For example, since the beginning of the year, the share price of confirm has fallen by more than 80%. The company recently cooperated with Amazon to provide loan options for purchasing goods of $50 or more on the platform. Due to the rising cost of capital, the company may face long-term resistance.
Klarna, a Swedish bnpl company, was also hit. According to the Wall Street Journal, its valuation was lowered to $15billion after the previous round of financing of $45.6 billion.