Recession Readiness Insights

How Fintechs Tackle Economic Headwinds

How Fintechs Tackle Economic Headwinds

June 26, 2023 | Olivia Voltaggio

June 2023’s Market Pulse Webinar explored how fintechs are tackling not only economic headwinds, but tightening credit. We learned how to gain - and keep - momentum by fueling business agility, adapting to an uncertain market with confidence, and focusing on moving forward.

The webinar featured four guests. Amy Crews Cutts, of AC Cutts & Associates, presented an informative macroeconomic update, while David Sojka, Risk Advisor at Equifax, shared the latest consumer credit trends. Kabir Kumar, Flourish Ventures, and Ratinder Bedi, SoFi, lead a lively discussion on how fintechs can thrive in the current environment.  

Macroeconomic Observations and Updates

Today’s context powers tomorrow’s decisions; although predictions are simply best estimates, they still hold invaluable insights. In fact, before sharing her updates, Amy Crews Cutts made an astute observation. Cutts stated, economists are like weather people in that they forecast what is on the horizon, but find it impossible to maintain 100% certitude.

Consumers are not only keeping pace with inflation, they are actually adding to their overall savings right now. Also, overall shelter costs have been mismeasured since those with fixed mortgages, and renters with locked-in rates, are not impacted by market fluctuations. Other volatile markets include auto, specifically used vehicles, and energy services. 

Next, Amy discussed inflation in conjunction with production prices, or “the costs of producers to deliver newly-manufactured goods into the marketplace.” Unfortunately, the higher cost of producing new items is being passed off to consumers. This will be a wait-and-see situation to discern if businesses keep prices high to pad their reserves in case of continued market volatility, or if there will be an overall price decrease both in cost of production and the new goods. 

In terms of inflation, we have been here before. In the late 1970’s we battled far higher inflation than we are currently, therefore the latest banking crisis - while indeed a crisis - can be explained and should not cause too much alarm. Even with deposits decreasing and investment funds increasing, banks are not currently in dire straits. In fact, the FDIC has fewer troubled banks on its list right now than it did in the prior quarter, so there is optimism surrounding the end of the bank failure crisis.

Consumer Credit Trends

Originations, debt and delinquencies were topics of discussion for David Sojka from Equifax. He took a broad approach, as well as a direct look at the fintech arena. 

Looking at the landscape in 2022, fintechs took a step back from their share of the subprime market converting unit origination due to various pressures throughout the economy. While originations are down, 2022 was a record-high year due to an increase in behaviors like online shopping. 

Both general revolving debt and fintech revolving debt was at its highest level in April 2023, however non-revolving debt decreased slightly. Although card balances did recover some of their losses throughout the holiday shopping season, non-revolving debt saw a slow down during the same period. 

Regarding delinquencies, we have seen our second consecutive decrease month-over-month across the board. While they are still at a yearly higher-than-average rate, it seems like consumers dedicated at least a part of their tax refunds to paying down their debts, particularly in the auto and bank card arenas. This trend also applies to fintech. 

Discussion of the Current Fintech Environment

Kabir Kumar, Flourish Ventures, and Ratinder Bedi, SoFi, explored the impact of current and expected economic challenges on fintech leaders, as well as how they can not only sustain customer growth, but also help profitability.

Thoughts about possible challenging economic times ahead? 

It is prudent and responsible to ask tough questions so we can learn and better understand how to prepare for both hidden risks and unrecognized opportunities. As such, the question was posed about whether or not a recession is coming, and if so, how to best prepare.

As stated earlier, economists can only offer a forecast, not tell the future. If, then, a recession is on the horizon, there are ways to get ready:

  1. Have a recession-preparedness playbook. If your business does not have one, this is a great time to start. Review what risk-management options are already in place, and build upon them. 

  2. See warning signals. Are delinquencies on the rise? How is vintage performance?  How many calls for financial assistance are happening? 

  3. Couple real-time occurrences with macroeconomic signs. Does what’s happening in your world coincide with the NY Fed’s recession model and the consumer Confidence index, for example?

  4. Keep in mind we are in a post-pandemic world. Be aware of dated information, but know predictive data has worked throughout history to a degree. 

Furthermore, it might be advisable to take actions like tightening credit in relation to elevated risk, as well as preparing for things like high unemployment rate. Bottom line: build a preparedness framework for your business to support your own risk appetite.

How the current environment influences underwriting decisions.

Next, we explored how different data sources can influence various underwriting models. Ratinder Bedi of SoFi explained how his company seeks out prime and super-prime players throughout their various life stages, therefore those members tend to be more resilient. 

Even if you have solid membership, in this environment, we know anyone can still be affected. The best way to hedge against the unknown is to implement proven strategies and invest in a strong foundation that helps you grow your businesses through consumers who are able to reach their financial goals.

Identifying and thwarting fraudsters. 

While advancing technology can be a wonderful thing, it can also fuel bad actors. The increase of fraud has expanded and shifted to greater incidents of identification and third-party fraud as fraudsters have become more technologically advanced. 

We must instill a culture of vigilance and tap into new tools, like biometrics, to stay on top of the problem. This has caused fintechs to spend more on B2B than B2C in the first quarter alone, as deep learning and AI are utilized both by fraudsters and against them. The key is knowing one type of solution cannot solve everything.

In conclusion, as a looming shadow of possible recession appears, it means companies should take a conservative approach to combat hidden risk, but allow room for innovation to find hidden opportunities within fintechs. The takeaway: prepare for the worst but with some optimism. 

For more information on the latest Equifax Consumer Credit Trends and to register for future Market Pulse events, click here. If you missed our June 2023 Market Pulse webinar you can view the slides here or watch the recording here.

* The opinions, estimates and forecasts presented herein are for general information use only. This material is based upon information that we consider to be reliable, but we do not represent that it is accurate or complete. No person should consider distribution of this material as making any representation or warranty with respect to such material and should not rely upon it as such. Equifax does not assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice. The opinions, estimates, forecasts, and other views published herein represent the views of the presenters as of the date indicated and do not necessarily represent the views of Equifax or its management.

Olivia Voltaggio

Olivia Voltaggio

Senior Content Manager, US Information Solutions

Olivia joined Equifax in 2019. She graduated from the University of Illinois at Urbana-Champaign with a Bachelor of Science degree in advertising and a Bachelor of Arts degree in English. Olivia holds an Editing Certificate from the University of Chicago Graham School.