With the challenges of the macro environment and tight funding, banks will seek to partner with fintechs more in 2024 than last year since it is difficult to fund internal growth to build new functionality, according to Luther Liang, director of product at Grasshopper Bank. These partnerships are cost-efficient for both organizations planning to grow, Liang said.
While fintechs have long provided credit to low- and moderate-income borrowers, the rising cost of capital and higher cost of living has led to a drop in fintech-originated loans in 2023, according to a recent research brief published by the Federal Reserve Bank of New York’s community development team, last month.
However, Liang is optimistic and thinks that fintech lenders will have the opportunity to grow in 2024.
“Rates remain higher for longer, and while the Fed is potentially pausing further increases, it’s not a great environment for traditional loans,” Liang noted via email. “Consumer lending will have opportunities to refinance as pandemic-era programs are ending. Businesses will need to watch and wait. It will be a good opportunity for fintech lenders and others with low costs to grow. ... Everyone in the market (fintechs/banks) are picking up the pieces from all that has transpired this year, so the ones that figure it out become stronger than ever.”
Since bank partnerships are under scrutiny, which will continue into 2024, many fintechs and banks will reevaluate their relationships and might change them for better security and expertise, he added.
Meanwhile, Daniel Haisley, executive vice president of innovation at Apiture, thinks that fintechs will increasingly pool into a smaller number of specialized banks.
“Most financial institutions teetering on the edge of whether or not to get into [banking-as-a-service] will opt away from it to avoid the regulatory pressure despite the need for new deposit streams,” Haisley noted.
Mike Butler, CEO of Grasshopper Bank, echoed Liang on the bank-fintech partnership.
“There will be more fintech partners looking for bank partners than ever before. The fintech/bank model will remain the preferred model in 2024 for most fintechs versus trying to obtain a bank charter,” Butler said in an email response. “The fintechs who have a clear path to profitability will win.”
Jonathan Gurwitz, credit lead at Plaid, thinks that lenders are still braced for some volatility overall, driving their focus on managing portfolio risk and thinking about long-term performance while continuing to digitize and boost operational efficiency.
Recent research by Plaid showed that 83% of consumers are comfortable sharing proof of primary income and 73% are comfortable sharing bank statements and utility payment history. Gurwitz said that lenders are open to using more data types to approve borrowers and avoid delinquencies.
“I think lenders are looking for ways to drive profitability through technology and bringing in new [cash flow] data can be helpful for better managing risk and approving more borrowers,” he told Banking Dive.
As credit card balances reach over a trillion dollars, Gurwitz said an essential piece of fintech lending is focused on personal loans, and the use case of those personal loans often helps to consolidate higher credit card debt at a lower rate and save borrowers money.
“So, when you look at the credit card balances, I do see an opportunity as we work through the choppy macro environment for volumes to scale over the course of the year, given that overall balance of outstanding credit card debt is a great opportunity, I think for lenders and borrowers alike,” he added.