Fintech CFOs seek reliable funding as investors pull back, demand higher returns

Fintech CFOs seek reliable funding as investors pull back, demand higher returns

Fintech lenders are strengthening their funding capabilities, seeking sources of capital that are sustainable through an extended downturn.

Financial technology firms – many of them established in a low interest rate environment – ​​have found willing buyers for their loans in recent years as financial institutions looked for investment opportunities.

But this dynamic is shifting, as rising interest rates prompt investors to demand higher returns and become more selective about where they put their money. Banks, meanwhile, have become more cautious about credit risk and the general economic outlook and are generating better returns from the loans already on their books.

The credit quality of the loans has also deteriorated as borrowers, especially those with spotty credit histories, are increasingly falling behind on their payments. In July, annual net losses on fintech loans among consumers with weighted average credit scores between 680 and 710 rose 5.34 percentage points from a year earlier to 10.87%, according to Kroll Bond Rating Agency LLC, a credit rating firm. The same metric for borrowers with credit scores between 710 and 740 increased by 0.51 percentage points over the same period, to 4.69%, according to KBRA.

Fintech companies, which have different business models and funding structures, are taking steps to strengthen their funding, including finding long-term investors willing to ride out a shaky economy, seeking out more loan buyers and, for those with a bank charter, relying more on on deposit.

San Mateo, California-based Upstart Holdings Inc.,

which specializes in personal loans for subprime borrowers, is looking for new investors, which could include sovereign wealth funds, pension funds or insurance companies, that would be willing to buy loans when other investors pull out, chief financial officer Sanjay Datta said.

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“We’re in a bit of a paradigm shift now, moving from using what historically would have been pure capital to finding more permanent, long-term capital partners,” Datta said. The company said it is early in the process of seeking those investors, and declined to provide further details.

The upstart generates revenue by matching financial institutions — banks, credit unions and institutional investors — with loans and charging fees for that service. The company sources most of its loans through Cross River Bank, a Fort Lee, NJ-based community bank that caters to fintech companies. Some investors split them into securities and sell them in transactions sponsored by Upstart.

Upstart’s CFO Sanjay Datta



In the second quarter, the company saw a sharp decline in demand from investors and banks. Upstart arranged 321,138 loans during the quarter, or 31% fewer than in the previous quarter. Second-quarter revenue fell 26% over the same period, to $228.2 million. Upstart expects revenue to drop another 25% during the third quarter, to about $170 million, due to ongoing funding constraints.

Upstart, which went public in December 2020, has operated with a fee-based business model centered on loan relief. Now, while it seeks a long-term capital partner, the company is considering temporarily keeping loans on the books. That’s a reversal from last spring, when it said it wouldn’t. Upstart will have the ability to fund its own loans if demand from third-party buyers remains a challenge, Datta said.

Parking loans on the balance sheet will provide interest income, but also involve taking more credit risk. “What has changed since three or four months ago is that certainty among capital providers — there is a real anxiety out there about what the future of the economy holds,” Mr. Datta said.

Berkshire Hills Bancorp Inc.,

a Boston-based lender, said last month that it would stop originating through Upstart for the foreseeable future. As of 30 June, the bank had a loan portfolio worth 7.8 billion dollars, of which 152 million dollars was raised through Upstart. “We believe that given the economic uncertainty, taking a break in new origins from this partnership is a prudent course of action,” Nitin Mhatre, Berkshire’s chief executive, told investors on a July 20 earnings call.

Other fintech lenders, some of which are unlisted, are feeling the pressure as investors demand higher returns. Buy-now-pay-later supplier Affirm Holdings Inc.

aims to line up a diverse set of loan buyers and financing channels, CFO Michael Linford said during an investor conference in June.

Affirm – which has partnerships with companies including retailers Inc.

and Walmart Inc.

and e-commerce company Shopify Inc.

– has grown rapidly in the past year. Gross merchandise volume, which measures all transactions on Affirm’s platform net of refunds, increased 73% during the quarter ended March 31, to $3.9 billion.

Affirm finances its loans through a mixture of securitizations, whole loan sales and warehouse credits, where the company borrows against consumer loan balances. “We’ve been thinking about building our capital program so that it’s not dependent on one channel, one partner, any type of partner,” Linford said during the June conference call.

San Francisco-based Affirm is scheduled to report its quarterly results on August 25. Investors will be watching to see if the company’s access to capital has become more difficult, and how much the cost of funds has increased, says James Faucette, CEO. director of the financial firm Morgan Stanley.

Outside capital works well when market conditions are favorable, Mr. Faucette said. “But the flip side is what we’re seeing right now — you tend not to have as much reliable access to capital during periods of economic stress,” he said.

LendingClub corp.

, which specializes in personal loans, is financing more loans with bank deposits as some investors demand higher returns, another way to tackle the problem. LendingClub received a banking charter after acquiring Boston-based Radius Bank last year for $185 million, giving the company access to deposits.

San Francisco-based LendingClub — which faced its own funding challenges before becoming a bank — in the second quarter retained 27% of the consumer loans it originated, which was above its target range of 20% to 25%, according to Tom Casey, the company’s chief financial officer. The rest of the loans were sold to investors, LendingClub said. The company had $3.8 billion in loans during the second quarter, up 41% from a year earlier.

Mr. Casey described the company’s bank-like business model as the product of a years-long transformation that brought benefits such as a cheaper source of funding and the ability to issue loans.

“If you don’t have the opportunity to finance your own loans, you will be dependent on the capital markets and different types of financing. It’s always going to be challenging for you to predict the price at which you can sell your loans,” said Casey, discussing his outlook for the sector.

Write to Kristin Broughton at [email protected]

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