Chirag Shah, founder and CEO of Nucleus Commercial Finance and Pulse.io
Fintech lending has been a massive industry disruptor, changing the face of both personal and business finance. Delivering faster decisions, tailored solutions, and considerably less paperwork than traditional lending, its proven to be a veritable marvel. And yet, there’s a sizable fly in the financial ointment – the cost-of-living crisis. Like everything else, fintech lending is working through a lengthy economic squeeze. So, how is it responding? And what does it mean for the industry?
The role of fintech lending
We’re at the stage in the cost-of-living crisis where few people need it to be explained. We’ve all experienced the ever-increasing prices when we head to the local grocery store or pick up a takeaway coffee. We know that our cash isn’t going anywhere near as far as it did a few years ago and that the same will apply to our business coffers. We’ll also know that traditional lenders tend to close shop in times of economic crisis. The lights may be on, but the lending criteria are so rigidly high as to make it largely inaccessible. And that’s where fintech lenders come in.
Equipped with algorithms and analytics, fintech lenders have been able to offer credit where conventional financial institutions have been wary. And because of this, fintechs have, in many respects, been able to feed the economy where it has previously looked a little emaciated – primarily the small and medium sized business sector.
The problem is that the same economic conditions that drive businesses to seek fintech lending solutions also increase the risk of loan defaults, and the cost-of-living crisis has created a tough balancing act for fintech lenders: How to keep extending credit while managing the health of their loan portfolios.
The cost-of-living challenges faced by fintech lenders
Reduced demand
A recent survey by KPMG showed that 59% of fintech firms have observed a decline in new customer acquisition compared to the previous year. While this is perhaps to be expected – when the economy is struggling, few businesses wish to take on additional debt – it does mean that fintechs will need to reassess their growth strategies and customer engagement approaches.
Difficulty in raising capital
Global venture capital investment in fintech has dropped by 21% since 2020. While this can partly be attributed to the fact that fintech is no longer shiny and new – two of the criteria investors tend to look for – it’s also down to the current economic climate. And if fintechs can’t access cash, they will have difficulties lending it, which removes one of their key differentiating features. To bolster and maintain investor confidence, fintech lenders need to leverage transparency, engage in open dialogues about their financial health, and provide clear roadmaps for future success. Without this, creating a narrative that resonates with investors in such a turbulent climate won’t be easy.
Increased competition
It can be taken as a testament to the success of the original fintech lenders that the market has dramatically expanded. In the last six years, the number of fintech companies has increased by almost 60%. And while this is great for customers, it does mean increased competition for those in the market, leaving all players with a need to improve their value proposition and customer experience constantly.
Regulatory challenges
Fintech was once almost entirely untouched by regulation, but that has changed. While there’s no arguing against this being a good thing, it does mean that compliance costs have risen by 15% in the past two years and are likely to continue that upward trajectory.
Cybersecurity
Cybersecurity is a concern for every sector, but for fintech, it has to be the be-all and end-all. The cost of global cybercrime hit an estimated $8 trillion in 2023. If a lender can’t protect their customer’s data, they won’t stay in business for long. But the cost of doing so is rising along with everything else.
So, what does the cost-of-living crisis mean for fintech lenders? In short, it means greater complexity, competition, and a diverse set of challenges. Compliance and cybercrime were always going to rear their heads, they were always going to come on to the fintech agenda at some point, it’s just unfortunate that they have reached a point of urgency while there are so many other demands and challenges for the fintech industry to navigate. But none of these problems are insurmountable. While there will inevitably be some losses along the way, for the most part, lenders are willing to evolve and adapt, showing the innovation that the sector has become famous for to support their customers and weather the current economic storm.
Chirag Shah, founder and CEO of Nucleus Commercial Finance and Pulse.io has over 20 years of experience in the financial services industry and a deep understanding of the needs of UK SMEs.
In 2011, he founded Nucleus, a leading alternative finance provider, to offer flexible and tailored solutions for SMEs across various sectors and stages of growth. With an understanding of the challenges that UK SMEs face in the current economic climate, Chirag launched Pulse in October 2022, a free-to-use service that helps businesses and accountants gain insights into financial performance with AI-powered data visualisation and personalised dashboards. Chirag is not only committed to driving growth and innovation in the UK business ecosystem, but he’s also helping SMEs better understand their data to boost their profitability and guide them towards success.
