Winyield said that less than ten per cent of the fintech lenders it interviewed had staff with “previous relevant credit experience.”
This is defined by Winyield as a person who has worked in a risk/underwriting team at a bank, credit fund or alternative lender that has underwritten a similar type of credit risk prior to joining the team.
Fabricio Mercier, Winyield’s founder and chief executive, told City A.M. that the definition was “professional qualifications agnostic”. However, he added that the person must have had “at least” one and a half years of experience to be considered appropriately experienced.
Winyield’s report also expressed concerns around the underwriting models used by fintech lenders.
It found common underwriting models at these lenders were composed of a black box using “basic” regression analysis. Winyield also found there was often no human overlay to assess the viability of loans.
Basic underwriting models
“When you start actually looking into them, many of them are as simple as taking the [credit] scoring of other technology firms that provide the scoring to banks,” Mercier said, noting that these scoring methods were not even used by banks themselves anymore.
The Winyield chief executive explained this was a “very laggy factor,” with the scores only changing once every two years. This, Mercier said, means that they could not be appropriately used for small companies where market conditions can impact their credit “a lot.”
“The second issue is some of the models are based on looking at the bank account of the company. And if there’s enough money to operate the business for the next six months, then they will lend to this business for three months. So they don’t look at how resilient the businesses are or what the business is doing. They just look at the credit balance,” he continued.
Mercier said the issue with this is that people can take advantage, taking loans at the best time for them “even though the situation is very risky.”
“It’s clear to us from the interviews that the best model is a hybrid model, where you use common sense from a human and you attach this with tools that allow people to get the data quickly and to operate efficiently,” he said.
Fintech investor perspective
Tim Levene, chief executive at fintech investor Augmentum Fintech, told City A.M. that human overlay was “critical.”
“Having pure automation, without any human overlay is going to be a challenge. And I think most investors would struggle to back a lending business without that track record to demonstrate that, actually, you could do it without human overlay,” Levene explained.
He admitted there was no “one size fits all,” however.
“Depending on what you’re lending, in what segment of the market and to whom and to how much, how long will determine the combination of technology and human input that makes sense,” he said.
For Levene, what was essential was the track record of the lender.
“As an investor in the fintech space, of course, whenever we see an emerging and innovative digital lender, the question we ask is, can we have a look at the track record, their ability to lend, and often you just don’t have what I would regard as enough data points to be comfortable enough to take the plunge.
“If you look at the most successful credible, digital lending platforms, they tend to be those that have been around a long time. And that is no surprise because they have built up that track record over a long period through a huge amount of data, through the issuance of loans, and through learning through a number of different cycles,” Levene explained.
“It takes these businesses time [to establish themselves] and often they perhaps aren’t quite the hottest, shiniest fintechs in the room.”
Based on analysis of their operating models, Winyield believes that many of Europe’s fintech lenders are running an “uneconomical” business and will never become profitable.
This was largely because the lenders had significantly underestimated their marketing and operating costs, while also dramatically overhyping the market opportunity, Winyield found.
“Ecommerce, for example, was a €596bn sales market according to Statista in 2022. It sounds like a huge number. But because there’s a 30-day sales cycle, fintech lenders in ecommerce have to lend 12 times a year to keep the same amount of lending on their books,” Mercier explained.
“In addition to this, the vast majority of ecommerce companies are either operating abroad, or have very limited trading history. Factoring this in, the opportunity plummets to somewhere between €1.5 to €2.5bn. That’s more than 200 times smaller!”
Further, the European market is much more complex for fintech lenders due to its 27 different combinations of rules, laws and languages.
Based on the numbers WinYield gathered, with a single product and one jurisdiction, the asset under management level for which a lending fintech would break even can be as high as €150m for a SaaS lender or €160m for a credit card lender.
Winyield said reaching these levels may be challenging in many European countries.