Not all Fintech services are good for society

Efi Pylarinou is the founder of Efi Pylarinou Advisory and a Fintech/Blockchain influencer – No.3 influencer in the finance sector by Refinitiv Global Social Media 2019.

The consumer debt levels in the US remain high and Fintech has contributed to this substantially.

Q2 2020 was the first quarter that household debt and credit dropped since 2014! However, 2019 closed with nearly $4.2 trillion in consumer debt (a record high which does Not include mortgages). According to Alicia Katz`s investigation (Deputy editor of The City) this surge is due to ` high-interest personal loans, increasingly offered by online financial technology companies known as “fintechs.”`(excerpt from the Fintech Debt trap

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Delinquencies are rising in the US and back in July, OnDeck the publicly traded Fintech online lender was acquired by Enova. OnDeck was 14yrs old and 2yrs ago had launched a B2B business (JP Morgan was one of its partners). But business didn’t work out as planned and we can’t say that COVID19 is fully responsible for the fact that OnDeck was sold for $90 million which according to the American Banker is only 10% of its market value in 2015.  Only $8 million is paid in cash, and the rest in Enova stock.

Enova (NYSE: ENVA)  and OnDeck® (NYSE: ONDK) public markets history

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The fact of the matter is that what kind of Fintech services are good for society, is a major topic of controversy. Some would say that it is a matter of Financial inclusion, to offer to everybody access to consumer loans. Others will say that if this is not done holistically then the loan maybe be increasing the risk of the borrower and worsening his-her financial situation now and in the future.

Another Fintech service that shows this, is the Buy Now Pay Later business model, which seems like a fantastic enabler for the end-user. Several options to choose from, little hassle to execute, mostly no interest rate charges but flat fees. But again, nobody has the full picture of the consumer`s finances (assets & liabilities) and the contextual uncertainties to decipher whether another BNPL transaction will impact or not the bottom line.

Alex Johnson covers the topic of Embedded Finance in some detail and points out that `companies can drive customers to make decisions that aren’t necessarily in their best financial interests.`

All these doubts, as Affirm (one of the main US BNPL players), is preparing for its IPO with an expected valuation up to $10billion. It is an 8yr Fintech that has raised $1billion.

Is kicking the can down the road, good for your financial life? For some it does not matter but for many it makes a whole lot of a difference. Especially for those that the BNPL offering is the only way to make the purchase.

Down and under, Afterpay (ASX: APT) the already publicly listed major BNPL player that is international already has surged recently to close to $100 and a market cap of $26billion. It listed back in 2017 and has risen since over 2000%.

The Motley Fool reports that its sales soared 112% to $11.1bn, active customers increased 116% to 9.9million and active merchants are up 72% to 55.4k. However, the EBITA gains of 73% to $44.4m reported are masking the reality. They are only due to FX gains from AfterPay`s foreign business and the group’s EBITDA has actually dropped 4.9% from the previous corresponding period.

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Seems that investors are betting that the BNPL Fintech business model will become the new normal. The question remains whether such a development is in the best interest of end-consumers. Despite the rebundling Fintech trend, nobody has the entire picture of your finances and almost everybody continues to have several financial service providers – explicitly or hidden.

The BNPL publicly listed stocks include: Afterpay (ASX: APT), Zip Co (ASX: Z1P), and FlexiGroup (ASX: FXL). Klarna and Affirm are the big private ones and soon Affirm will step into the publicly listed space.

Not all Fintech services are good for society, the economy, or the end-user but they maybe be good for investors. What an irony!

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