How to manage the fintech margin squeeze

By Stirling Streeter, Enterprise Account Director at CreditorWatch

It’s a delicate balancing act among persistent economic headwinds

Has the growth at all costs movement come home to roost? You only have to look at the considerable layoffs in big tech such as 500 at Atlassian, 7,000 at Salesforce and 9,000 at Amazon, among many more, to see the considerable pivot in the wider technological landscape to difficult market conditions.

In what could be considered the largest squeeze on margins in recent memory in a crowded Australian Fintech market, many of the smaller players have inevitably been burnt by the relentless increase in interest rates to temper stubborn inflation. For many years equity was thrown at businesses with a growth at all costs mindset. Those however that have grown unsustainably and taken on significant credit risk exposure, are now faced with the prospect of dry debt and equity markets and not enough scale to weather the storm amid the mounting headwinds. Typified by the BNPL space, the causalities have been numerous, with a high likelihood of more to come. 

The CreditorWatch Business risk index for April 2023 shows that the three industries with the highest probability of payment default over the next 12 months are:

1.     Food and Beverage Services: 7.1% (down from 7.2%)

2.     Arts and Recreation Services: 4.8% (down from 4.9%).

3.     Transport, Postal and Warehousing: 4.7% (down from 4.8%).

CreditorWatch Chief Economist Anneke Thompson has indicated the next few months will be telling with businesses experiencing both rising prices and interest rates with many industries not being able to pass on the increases in prices to consumers. This is best typified by the construction industry, which is largely dominated by fixed-priced contracts and greatly reduced profit margins. For Fintechs, it’s critical they understand what exposure they hold to these industries to ensure they aren’t overly reliant in one area and risk is spread accordingly.

Although where to allocate resources is a delicate tightrope to walk for most, securing new business should not come at the expense of unsustainable risk exposure by poor due diligence and risk management. The overwhelming trend in the market is a shift towards greater access to a variety of data sources and depth to help facilitate a clearer customer risk profile to enable a more steady, sustainable and risk adverse growth trajectory. Those that have been disciplined in their approach in the times of cheap money, will certainly be well placed to navigate the short-term turbulence and thrive in the next few years. 

Businesses could be excused in times of hardship to just batten down the hatches and wait for inevitable fall in interest rates. A number of businesses, however, are taking a more proactive approach and using the opportunity to assess legacy data, vendors and processes to ensure the business is operating as leanly and efficiently as it can be.

This could be a multi credit bureau approach, deepening vendor relationships to uncover greater efficiency gains or simply looking at automating resource heavy processes. Collections is one such example - an area often laden with heavy staff resourcing to ensure cash is collected in a timely manner. Currently there are a number of effective technological solutions on the market that drive significant automation, require far less staff resourcing and provide a better customer experience. In times turmoil, more resources, cash and a better UX could be crucial for survival during this tough period.

Competing through automation 

In what will be an evergreen theme for the industry, the need for increased automation is only intensifying as Fintechs chase a frictionless onboarding experience to ensure customers aren’t lost at any stage of the sales funnel. Fintech’s operate in a highly regulated industry and are burdened by cumbersome requirements such as KYC/AML obligations, so often being ‘easy to do business with’ is challenging at best.

Never has it been easier for consumers to compare, access or switch services. Even the slightest sticking points in accessing services or funds can be the difference between a sale made or a loss to a competitor. So, what can businesses do to ensure they can effectively and efficiently compete now and going forward?

Firstly, its essential for Fintechs to partner with suppliers that are backed by secure, scalable and stable API connections to back end the experience and make informed decisions in a timely manner. Deep and transparent supplier relationships are central in ensuring customers are delighted by their customer experience and can be agile enough to fix things when things inevitably go awry. Partners that meet the gold standard for information security management such as ISO 27001 put themselves in the best possible position to ward of threats and provide peace of mind to partners. Taking a step further, CreditorWatch recently launched its ‘Trust Centre’ to enable complete transparency for customers to review what security controls and accreditations are in action and whether they are passing or failing. 

Identifying potential applicants under KYC/AML requirements is one such friction point that I’m sure many companies and credit applicants alike have struggled to achieve.  The shift towards biometric verification is an example of win-win where the customer gets a better UX while the company sees less fall out of the sales journey while also reducing the opportunity for fraud. According to the Australian Cyber Security Centre, fraud makes up 27% of online crime – double that of online shopping and online banking combined.

Knowing where to compete and when to partner is often a difficult strategic decision to make however. Resources are limited and it’s a fine balance between building your IP and outsourcing areas that aren’t your core competency. Some of the most successful emerging Fintechs in recent memory appear to be the ones that have thought particularly hard at the problem they are trying to solve and are best in market at their niche. Their elegant and simple to use solutions often deter large players such as the banks and big tech from competing while opening lucrative re-sale or partnership opportunities to fit different pieces of a puzzle. 

This year will no doubt be a transformative one for the industry, with much of the industry showing great deal of resourceful and resilience. The current landscape although difficult represents a good opportunity to assess whether it is getting the best outcomes from its resources to ensure its ready to capture to the turn to favourable conditions that I hope aren’t too far around the corner.