The continuous evaluation of credit-risk models and fluctuating macroeconomic indicators has become a daily task for fintechs focused on buy now, pay later (BNPL) credit, especially in the current context of high inflation and weak growth.
Mexican fintechs Kueski and Aplazo agree that maintaining a solid loan business in such a difficult economic environment requires a constant adjustment of customer credit profiles.
“Our models have improved considerably even as the economic environment has deteriorated. This has allowed us to keep non-performing loan rates fairly stable,” Aplazo co-founder and COO Alex Wieland tells iupana.
“The main adjustment we’ve made is that we’ve moved to dynamic pricing,” he says. Using technology and data processing, Aplazo calculates the interest applicable to each client, based on personal information and their credit history with the fintech.
This shift toward a more personalized approach reflects the pressure on credit fintechs to increase and maintain profitability in an increasingly difficult environment: the cost of lending continues to rise, liquidity is tight, which has triggered waves of layoffs, and capital injections have diminished. The fall of Silicon Valley Bank has further aggravated the situation and stoked fears of a global financial crisis.
Its a marked change from 2021, when record levels of investments flowed into the sector and credit fintechs were more focused on the volume of customer acquisition and the number of cards issued. In 2023, the sustainability and health of their portfolios is paramount.
Adaptability to the environment
This is the approach taken by Kueski, a BNPL platform with operations in Mexico. The fintech predicted last July that if the economic outlook continued to deteriorate, lenders would make corrections and put a brake on growth.
And deteriorate it has. Last week, the U.S. Federal Reserve once again raised its key rate to rein in inflation, fueling concern it could tip the economy into recession, which would weigh on the Latin American growth. Mexico’s central bank, for its part, forecasts moderate growth in a high interest-rate environment.
“We have been adjusting our models”, notes Fausto Ibarra, the fintech’s product director, tells iupana. “We do it regularly, based on the behavior of our clients and the level of interest rates, among other factors.”
In this context, the use of intelligent risk models gives fintechs an edge, allowing them to adapt more quickly to changes in the market. Aplazo and Kueski both say their BNPL sales are growing and that non-performing loan ratios are under control.
Once Aplazo has disbursed a loan, it makes a direct charge to the client’s card within fifteen days, which helps shed light on whether the user “is doing well or not,” says Wieland.
The information helps the company adjust its loan and interest policies, he says, adding: “You realize very quickly how the portfolio, or what we call a harvest, is doing,” he adds.
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Mexico holds steady as downturn shakes global BNPL firms
Major international BNPL players, such as Klarna, suffered sharp declines in their market valuations last year. The Swedish company, which leads the vertical, was valued at US$6.7 billion in July 2022, compared with US$45.6 billion a year earlier.
This dramatic correction reflects investor concern about the business model of lending fintechs in general, as they are often vulnerable to defaults, and BNPL companies in particular, as they typically burn through funds quickly as they place credits.
However, the Kueski and Aplazo executives say they’re business models are solid, given their personalization of credit and knowledge of the Mexican market, and that unlike Klarna, they charge interest not only to the merchant but also to the end user.
“What global players normally try to do is have the same model in all countries,” Kueski’s Ibarra says.
The Swedish fintech generates income by charging merchants a fee and offers end-users interest-free purchases when they register a debit or credit card and make the initial payment at the time of purchase. However, this constrains the fintech’s direct profit margin, according to Ibarra.
“We can monetize both with the business and with the final consumer and this gives us a lot of flexibility to monetize a loan in the right way and have healthy indicators,” says Aplazo’s Wieland.
As a result, Aplazo’s lending, and the number of affiliated businesses, increased five fold last year, Wieland says. Nevertheless, he acknowledges it’s a difficult environment for fintech companies.
“You definitely have to be very cautious and follow the market signals. You also have to be quite open-minded in order to adapt. But it’s not an issue just for BNPL,” he adds.