How Fintech Lenders Can Cope with the Impact of the Pandemic — Lessons from Flourish’s Portfolio Leaders

By Smita Aggarwal and Arjuna Costa

As we all live in the hope that the current strict social distancing guidelines will be relaxed soon, it is clear that this pandemic will lead to less human contact and greater digitization in our everyday lives. The trend of increasing availability of seamless digital financial services is likely to accelerate.

Digital credit providers — who have played a vital role in helping small businesses and gig workers invest in growth, and blue-collar workers bridge intra-month cash flow gaps — are facing negative short- and medium-term impacts. Challenges range from a scarcity of lending capital, as the debt supply chain contracts, to dramatic increases in the riskiness of loan portfolios, as borrowers face loss of income and closure of small businesses.

While the policy interventions being proposed at the national and multilateral levels could partially cushion the shock, these lending start-ups are going to have to navigate a period of chronic uncertainty. At Flourish, we convened the leaders of nearly a dozen of our portfolio companies that are lending across Asia, Latin America, and Africa. We were struck by the thoughtfulness of their responses to the crisis. What was most heartening was their starting point — that this is a health and emotional crisis before it’s an economic crisis. [click to tweet]

With that ethos front and center, we hope their strategies highlighted below form a blueprint for others to follow:

Minimize Credit Losses

• Reconnect with your customers: The first thing to do is to reach out to every single borrower and show empathy. Inquire about their well-being and build virtual proximity to them. Over-communicate with your borrowers with concrete information to allay their anxiety. This will also ensure that you have the latest contact information for all your borrowers and some insights into how they are coping.
• Segment and tailor approach: Refrain from a blanket approach for your entire customer base. Instead, assess what is at risk by doing a bottoms-up customer segmentation based on the extent to which their income generation capacity is impacted. Follow a calibrated action plan based on the underlying financial health of the borrower — from paying installments as per schedule to avoid penalties to offering to reschedule the loans to short-term emergency loans for those businesses that are providing vital services during the crisis. And be honest and realistic about recognizing potential losses from borrowers that will not be able to repay.
• Leverage your relationship: In times like these you want to be the first one the customer pays when they receive any income. But this will happen not through threat or force, but through persuasion and because the customer feels a sense of responsibility toward you to pay. Put your best people on collections and offer additional services that resonate with your borrowers’ needs. Offer incremental services to build stickiness such as sourcing, delivery support, payments, and accounting ledgers. Explore where relationships up and down the supply chain could be helpful. Build social capital with your good borrowers and repayments will start trickling in as their business picks up.

Manage Cash Runway

• Tighten spending: Scale back disbursements and rationalize operating costs to ensure you can keep operating till the situation stabilizes and capital starts to flow. While painful to consider, cost-cutting measures might be essential to the long-term survival and success of the business.
• Explore alternative funding sources: In a time of crisis, a variety of actors are motivated to help. Invest the time to explore local government support programs and your eligibility for grants and subsidies that may be selectively available.
• Explore new sources of revenue: Leverage the existing customer base to offer other fee-based products and services such as insurance. Repurpose the tech stack for other use cases such as facilitating benefit payments or donations. Offer white label apps to others, originate and service loans for third-party balance sheet lenders, or offer tools such as systems integration, API, and reconciliation to your partners.
• Feel free to dream: To the extent you have the luxury of under-utilized talent, give them the space and support to be creative about your product roadmap — it just might allow you to emerge from the crisis with a stronger value proposition for your clients.

Plan Carefully for New Disbursements

• Segregate the portfolio: Ring-fence the loan portfolio impacted by the pandemic and deal with it separately through a dedicated team focused on high customer engagement and collections. Monitor and report performance separately by pre- and post-crisis cohorts.
• Build new credit models: Disregard the old credit approval model and start afresh with a new credit underwriting model based on new realities. Many data points that would serve as proxy to debt servicing capability may no longer be valid. The key point is to lend only where there is visibility of current income flows that are expected to sustain. Be discerning in selecting good credit.
• Redesign product offering: Focus on lowering the risk profile through small ticket, short tenor, high-frequency repayment, end use control, and added guarantors. Enter risk-sharing arrangements with stakeholders of the borrower — employer or supplier or market platform.
• Focus on unit economics: Re-work operating models to be unit level positive. Keep customer acquisition costs close to zero, select customers with low default probability, and alter the revenue model to more upfront fees.
• Build trust with your funders: Demonstrate a well-performing new portfolio of loans to access incremental debt and equity funding. Focus on quality and not quantity to inspire confidence. Over-communicate with your funders and share your insights.

And, perhaps most importantly, your mission is now more relevant than ever, as credit remains a critical lubricant to keep the economy going through the current crisis and eventual recovery. So remain hopeful and stay motivated to serve your customers — they will need your support more than ever.