Interest rates and fintech: How Affirm and Upstart reacted

Rating the rate-hike effect

The Federal Reserve’s inflation fight is not slowing down, with more rate hikes coming. Higher borrowing costs hit fintechs in all kinds of ways, threatening their margins but also possibly tempting consumers into trying new ways of borrowing like “buy now, pay later.” There’s also the macroeconomic effects of higher rates and the economic slowdown that’s likely to come with them: A slowing economy hurts demand. Fears have already struck fintechs in consumer lending hard.

Higher rates are typically bad for the consumer lending business. When interest rates are higher, fewer consumers typically want loans — and fewer can qualify as borrowing costs go up.

• Online lending company Upstart reported results this week that beat analysts’ expectations, but shares plunged a staggering 56% Tuesday on macroeconomic fears. Upstart pulled in $310 million in revenue for the first quarter, above expectations of $300 million. But it cut its 2022 revenue forecast to $1.25 billion from $1.4 billion.
• “It’s really as simple as when the consumer rates go up, that means on the margin, a whole bunch of people that would have been approved are no longer approved,” Dave Girouard, co-founder and CEO of Upstart, said in a call with analysts. “So there’s a whole bunch of loans that never happened at all. And there’s a bunch of people that are still approved, but the interest rate is a few percentage points higher, and a certain fraction of them are going to decide that’s not the product that they want. They don’t need it.”
• Upstart’s average loan pricing has jumped more than 300 basis points since October 2021, Girouard said.

The “buy now, pay later” business may be pulling away from broader consumer lending. Contagion from Upstart caused a sell-off in Affirm’s shares ahead of its earnings, but the company’s share price promptly recovered after it announced results.

• Affirm shares soared 33% after markets closed Thursday to nearly $24, bouncing back from the hit, largely due to stronger-than-expected quarterly results and a smaller-than-expected loss.
• The company brought in about $354.8 million in total revenue, with a net loss of $54.7 million compared to $287.1 million in Q3 2021.
• Affirm said it hasn’t had to do anything about interest-rate hikes so far. “It is true that as rates go up, there is pressure on the funding side of our business. But it is a mistake to think about that as a full flow-through on a linear basis,” CFO Michael Linford said in its Q3 earnings call. “I think in the very long run, so going out more than a year, you would expect us to narrow in, but that’s more of a long-term thing.”
• “Buy now, pay later” is a different kind of lending, because it’s typically short-term and often subsidized by merchants. Merchants may want to push zero-interest offers to lure in consumers, and pay-later plans may look more compelling when compared to putting a purchase on credit cards as rates rise.

Fears of a possible recession are also weighing on lending. If a recession hits, consumer spending will drop and the lending business will be hit even harder.

• Upstart has seen delinquencies increase between November and February, which leads to higher interest rates for consumers and lower conversion into business for Upstart, the company said. While that rate has stabilized now, a recession could make defaults worse. The risk of recession as well as general macroeconomic worries caused Upstart to cut earnings expectations.

Further interest rate hikes may force companies to act faster. Perhaps Upstart is just being more realistic about its outlook in the rising interest rate environment, and perhaps Affirm has the benefit of a differentiated business model. But if the Fed presses harder on the brakes, it will be all the more crucial for companies to make sure they’re in the right lane.

— Tomio Geron (email | twitter) and Lindsey Choo (email | twitter)

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