Neobanks and lending fintechs are facing a growing number of obstacles to achieve profitable growth, which is forcing them to adopt measures including lending from their own balance sheets, cutting costs and reinventing their ecosystems in search of complementary products, according to analysts and investors.
The lending business is particularly exposed to economic cycles, and in an inflationary environment with weak or negative growth, customers are defaulting on loans and scaling back purchases. This, coupled with a prolonged capital drought, is putting pressure on digital lenders. In addition, the market is becoming more competitive as banks step up investment in digitalization.
The adversities facing credit fintechs are evident in Mexico, for example. Nubank’s Mexican unit is dragging down the neobank’s overall performance, and its recently debuted savings account has got off to “a challenging start,” according to a recent report by Brazil’s Bradesco. Lending has slowed while the company’s non-performing loan (NPL) ratio in February was almost four times the market average: 11.4% versus an average 3% for the country’s lending sector, the report said.
Another digital finance heavyweight, Mercado Pago, said last week that it‘s slowing lending as part of its risk management strategy.
“Credit businesses are built to withstand cycles […] You don’t want to be able to only make money in good times, but you need to be able to make money in bad times as well and. You have to be very diligent in underwriting and managing credit risk”, Mike Packer, a partner at QED Partners, told iupana. QED is a venture capital firm that has invested in digital lenders such as Konfio, Covalto, Cora and Fairplay, and was also at an early stage backer of Nubank.
“In reality sometimes that means business spending less time trying to find more customers, and more time trying to figure out how to collect better,” he said.