WORKWEEK

Before we dive in, I do want to say that I’m not some doomsday advocate hoping for a shitty economy, and I really hate thinking from a negative mindset. Recessions and bear markets are not good for anyone—investors, founders, but more importantly, real people outside of the tech bubble. But I think I’ve been pretty clear that I’m of the opinion that we’re in the beginning stages of a long recession and I’ve been thinking about the impacts it can have over the next few years. So, I’m not hoping for a recession but I am planning for one. 

Now, the question I’ve been wondering is—can a recession help fintech companies grow, especially in consumer fintech? Crypto is a completely different question that we’ll explore another time, but fintech does seem to have a track record of supporting the economy when there are catastrophes. 

Pre-COVID, fintech was in a very different state—for a lot of reasons, mainly because nearly all of fintech is focused on offering a financial product through digital channels, fintech saw tremendous growth in traction. That was what triggered the huge rise in valuations for the sector over the past few years—VC’s saw public market fintech companies growing like weeds, and a lot of fintech startups were too; combined with an already frothy VC market, fintech valuations skyrocketed. 

Post-COVID, fintech valuations are coming back down to earth, but that’s not because users are suddenly not using fintech products. It’s because growth rates are steadying to normal numbers (a lot of companies pitched unsustainable growth metrics) and there’s more competition in the space. If you look closely, infrastructure that are a bit more insulated from consumer spending/banking trends are still seeing huge growth close to COVID levels. 

And there’s already some early data that indicates fintech could see another uptick over the next few quarters: we’ve written extensively about the huge growth in credit card balances, the impact it’s had on credit-card-as-a-service infrastructure companies. Back then, Deserve CEO Kalpesh Kapadia told us that many Americans were moving core spend categories like groceries, gas, and bills to credit cards. 

Now, it looks like BNPL users are also spending more on groceries and other necessary categories, according to an article from CNBC:

 “About two-thirds of consumers have worried in the past month about affording groceries due to the rise of inflation, a recent LendingTree survey found.

At the same time, Zip said it notched 95% growth in U.S. grocery purchases, according to The New York Times. Klarna reported that more than half of the top 100 items its app users are now buying are grocery or household items. 

“The fact that there’s a large number of Americans that simply can’t afford to buy food highlights the desperation that this economic climate creates,” said Marshall Lux, a fellow at the Mossavar-Rahmani Center for Business and Government at the Harvard Kennedy School.

“Once people start stretching out grocery payments it shows the height of personal desperation,” Lux added.”

Is this growth a positive or negative? If people are already having trouble paying for things like food or gas or their everyday bills, and need credit to pay for that, then it implies that much of this growth could be worrisome. In a doomsday scenario, we could see a lot of fintech companies see a huge amount of growth but also a rise in delinquencies too. 

Operationally, the key here is for fintech companies to understand, while this growth is great, they need to be mindful of just how overextended their customers are and, if things get tougher financially, how they’re supporting their customers to repay debts in non-predatory ways. Companies like Vol. 1 Ventures portfolio company TrueAccord help mitigate repayment issues by working with customers to figure out the best way to repay debt after users have fallen behind. Managing credit risk is a balancing act but most fintech companies are unfamiliar with it—after all, we’ve been in a bull economy for like 20 years now, and most fintech companies haven’t been around long enough to have great insights into credit cycles. So, another helpful move might be to hire more ex-bankers and people from traditional finance to teach and help manage that risk too. 

Managing credit risk efficiently is actually something that’s pretty doable within the current capabilities of a consumer fintech company—they’ve spent years working on mitigating risk around fraud, have a ton of consumer data points and insights, and have the systems to understand their users deeply. The issue will be putting all that together to understand the ups and downs of a rocky economy versus a thriving one. 

So, while fintech companies might be seeing a boom over the next few quarters, it’s important to keep an eye out on long term trends and see where the wind is flowing. Otherwise, these growth opportunities to help customers turn into potential landmines can blow up an entire company.