Credit is at the heart of what we do as fintech investors. But our approach to investing in credit startups has changed over the years, incorporating lessons from the past to bet on the winners of the future.
Looking at the last five to ten years of credit innovation, a number of highly publicized product and business models in the early stages of development have ended up failing to reach their full potential, or not be recognized by public markets for the value they thought they could achieve.
We have witnessed the stagnation of P2P platforms, as they have been subjected to a “glass ceiling” which has relegated them to niche players with rather insignificant market shares. What was initially seen as the “biggest disruption in banking industry history” in the early 2010s ended more or less in the same place in most of the world’s major markets.
We have seen self-proclaimed “tech first” lenders punished by the market because over time investing in customer and portfolio growth has overtaken the technology agenda. Many of them have ended up crowding the “specialty lenders” category of your favorite online financial portal, a far cry from their tech peers (and sales multiples) with which they started their innovation journey.
We’ve seen too many lenders forget the need to interact effectively with capital markets and build that much-needed part of businesses too late in their growth trajectory, resulting in more business resources than most founders would have. wish. Too often, access to capital markets has become the “break or succeed” factor that hinders the real scale.
We have also seen how, when the technology and innovation of the early days wears off, many neolenders are “just another credit provider” in the eyes of their customers; the memory of the “glorious days of past technology shine” is long gone.
Overall, lending innovation has been marked by this tension between being (and staying) a tech company (and keeping that recognition from customers and the public) and ending up building “yet another good one.” former incumbent operator ”.
So where does that leave us as fintech investors?
We have accepted one thing: lenders are lenders. And, as such, they have to face immutable truths. No matter how cool they are, they’ll need to say ‘no’ to customers every now and then (this is called the ‘acceptance rate’). No matter how innovative they are, they will have to “shorten” their language to equalize and be understood by the capital market operators who will need to fund them – and who are not particularly innovative. And, no matter how aggressive they are, their VC investors will need to understand that in order to build a new lender, VC money may not be used with the same efficiency as in other industries at all times (yes , the money can get trapped in a junior tranche of a debt structure).
With that in mind, how can new lenders still achieve “tech” status over time? In our opinion, it is about turning the loan from an unnamed “good to have” (as necessary as that may be) into a destination in itself. Thinking of the loan as a destination is:
Think about utility rather than economy: customers don’t (always / only) care about APR, interest rates, fees. They of course want to know that they are not getting ripped off, but if not, they care more about the utility credit (and, indeed, any financial product) given to them. “Will I be able to buy this or that?” “” Will I be prepared to face a peak in demand? “If things don’t go as planned, will I have a lifeline to keep my business or my family afloat? This is something that is very prevalent in the world of microfinance, where sometimes the lack of financial knowledge would only leave financial products to be understood in terms of causal empowerment, a kind of IFTTT for financial planning. These basic human behaviors apply to many other types of customers, even the most sophisticated …
Adapt rather than impose: Banks are not good at creating products that adapt to rapidly changing customer needs. With integration processes taking up to a few weeks for SMEs, a rating based on “last year’s balance sheet” or “at least three years of operation” and so on. , an e-merchant with high seasonality, a content producer who has just stood out, …, find what they need at all times? New lenders should focus on fitting in and amplifying their customer journey, not hindering it. It starts with being ‘data-intelligent’ during integration, creating data structures that allow the lender to be one step ahead of customer needs, and to think of underwriting and disbursement in terms. speed, frequency and availability.
Build part of the mind to fight irrelevance: A lender who wants to be a tech company must first think about the “product”. Even more, the ambition should be to become a central element (even a brand element) of the financial and operational life of clients. It requires rethinking product / market fit beyond basic lending considerations, and creating features that enhance the user experience beyond the credit cycle – even better, features that have utility. autonomous while improving the lending experience. A key question in this regard is how much of the experience should be verticalized – but that’s for another article!
For investors, it’s about building more resilient businesses (and Covid has shown how vulnerable loans can be). This involves supplementing net interest margin income with countercyclical income streams. It’s about embedding SaaS dynamics into a loan product and focusing on NPS, product usage metrics, etc. as much as on the APR and the NPL. At the end of the day, it’s about making sure that we don’t pay “technology multiples” on the investment and only get the “book-to-value” back on exit.
We believe that there are a few new selected lenders who are breaking new ground in this direction. Check out our portfolio for our own bets there!