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Fintech lenders on collision course with insolvency: BDO

Business

Fintech lenders providing start-up business funding, business overdrafts and lines of credit are facing increasing constraints on capital, according to a recent BDO report.

By Miranda Brownlee 11 minute read

The rate of insolvency appointments for local fintechs is expected to be up by around a quarter for the whole of 2023 based on the rate of failures to May this year, according to a recent BDO report.

“There has been an increase in the number of fintech failures in 2022, with the 2023 run rate of failure suggesting that this trend is set to continue, the Fintech in Australia: Weathering market uncertainty report stated.

“Many fintechs in Australia have struggled to demonstrate sustainable business models and generate consistent revenues.”

Fintech lenders higher up the risk curve such as credit card lenders, unsecured personal loans, short-term business overdrafts and lines of credit and startup business funding are some of the most at risk in the sector, according to the report.

“Fintechs providing credit services have the difficult task of managing their funding. In Australia, those without Australian Prudential Regulation Authority (APRA) oversight will not have the benefit of being an Authorised Deposit-taking Institution (ADI) and are unable to take deposits from retail investors. Fintechs without the ADI accreditation can only access corporate credit or wholesale markets,” the report said.

The aggressive tightening of cash rates by central banks around the world has severely impacted wholesale markets with banks such as Silicon Valley Bank and Credit Suisse collapsing earlier in the year.

“Wholesale debt investors have been wary of the solvency of smaller lenders and conscious of the recoverability of loans on their books - especially in commercial property and other areas of higher risk lending. Unfortunately these concerns have a habit of triggering other issues,” the report said.

“As some wholesale lenders pull back or tighten their own credit appetite, wholesale borrowers will need to be more cautious with their own loan growth. Typically, if there is uncertainty in the funds available to lend to wholesale borrowers, most retail lenders will also start to tighten up their credit appetite or raise interest rates further to temper loan growth.”

Fintechs that rely on wholesale markets and lending to riskier segments of the market will be the first to experience adverse effects of these changes in the market.

“Wholesale lenders to these fintechs may refuse to roll-over debt investments or they may demand higher interest rates to compensate for the increased risk. Capital is constrained, or more expensive, as the underlying borrowers themselves are also facing economic headwinds,” the report stated.

“Fintech lenders higher up the risk curve will probably find themselves unable to access funding at all, or at least not at a cost that is viable for their business model. These fintechs will need to prove they understand their loan book and its risks, and that they have taken early action to manage any arising problems.”

Investors are also showing a higher level of risk aversion with many funded fintechs not achieving the scale and rapid levels of growth that investors anticipated.

“Investors are conducting more rigorous due diligence on all deals that come across their desk, with many sophisticated investors implementing new risk matrixes with very low margins for variation,” BDO said in the report.

“That is, if exact requirements aren’t sufficiently met in terms of the fintech’s systems, management practices, finances and forecasts, deals might be dropped entirely without leeway for additional negotiation or discussion.”

BDO said the preparation will be key to fintechs in navigating the next period ahead.

“Understanding the operations, strategic plans, risk mitigation, and cash flow of a fintech has never been more vital than it is now. As the capital markets also undergo a correction and funding options are increasingly limited, fintechs must preserve their cash flow and stretch their runway where possible,” the accounting firm said.

BDO global leader, fintech, Tim Aman said tougher economic conditions can be a catalyst for innovation and new opportunities for fintechs that are opportunities and well placed to weather economic storms.

“Stronger fintechs will benefit from the opportunity to capitalise on market conditions from competitors who are consolidating their operations and preserving capital. Ultimately, these fintechs will increase their market share and presence,” said Mr Aman.

“Fintechs with robust strategic plans and structures will long outlast those that value rapid, and often unsustainable, growth. As we remain in the thick of market uncertainty and undergo a correction of the technology sector and fintech valuations, companies must continue to forward plan, be strategic with their operations and capital runway and above all, remain agile and adapt rapidly to changing conditions as they arise.”

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