What to watch in fintechs' Q4 earnings

The pressure inflation has put on consumers for the last year is expected to increase delinquency rates in fourth quarter reports, Hecht said. Some fintech lenders have tightened underwriting standards and increased borrower information requirements to mitigate the effects of consumer credit deterioration. Hecht said companies are also trying to offset delinquency costs with higher fees and pricing.

Oportun, which was founded to provide loans to low- to moderate-income consumers with little to no credit history, began working to mitigate inflation's impact by making its underwriting more stringent and focusing on returning, proven borrowers instead of new borrowers, according to the company. Upstart approved about 40% fewer applicants than it would have the previous year, the company said in its third-quarter earnings call.

Perito added that there's a disconnect between challenger banks that say consumers are healthy, and economists who are predicting a recession. He said that the stock market's concern about credit is probably based more on perceived future credit deterioration, instead of current data.

"There's a lot of paralysis in the market right now," Perito said. "We're stuck between this rock and a hard place –  the rock being everyone thinking there's a recession coming, and the hard place being the credit metrics today really aren't that bad."

Perito added that he doesn't think the fourth quarter results will provide much more clarity.

"I think we're going to probably come out of earnings in a month in a very similar place to where we went in," he said.

Fintechs will also continue to develop new products and enhance existing products to increase revenue per user, analysts say. 

Perito said fintechs need to look at how they can offer a broad suite of products to their existing customers, but thinks this will be tough in the current environment.

"I do think that product rollout will slow a little bit, relative to what we saw during the pandemic, because of the cost of capital," Perito said. "When these fintechs roll out new products, they're operating at a loss for quite some time. And so I think most of these fintechs are being pretty conscientious about what their cash burn is, and introducing a bunch of new products right now, I think, would be a little challenging."

Hecht said companies would only start pulling back on product development if they were worried about preserving cash, or if they wanted to pump the brakes in certain categories to prepare for an economic downturn.

SoFi has leaned on its product diversity in recent quarters as its original core business, student loan refinancing, has dipped. The company, which offers  loan services, credit cards, investing options and insurance, also debuted a Buy Now, Pay Later product in December. 

Hecht added that creating cross-selling opportunities with new products is a good strategy for revenue generation. He expects revenue per user to be a bright spot for fintechs in the most recent quarter.

"These entities are all uberly focused now on putting themselves on a path to profitability and financial independence so they don't have to raise capital," Hecht said. "One way to do that is to increase your engagement or revenue at the user level because you're not paying a customer acquisition fee for that user, you've already got them."

As the cost of capital has increased with the rising interest rates in the last year, it's been more expensive for companies to fund their growth. 

Fintechs with bank charters, like SoFi, LendingClub and Green Dot, have weathered the economic turbulence better. SoFi has been able to use deposits to fund loans, while LendingClub has offset a decline in loan purchases from investors by holding loans on its balance sheet. LendingClub also recently cut 225 jobs to pull back on the marketplace loan strategy previously core to its business.

A company that has more tenuous access to capital than deposits may have to tap into excess liquidity, Hecht said. Affirm has had to cancel securitizations and Upstart has had trouble issuing securitizations, which have been a standard source of growth capital to fund their businesses.

"[Fintechs without a bank charter] rely on wholesale funding markets," Hecht said. "That was a standard source of growth capital to fund their businesses. Now it's a very, very tepid market. The market has shied away from unsecured consumer assets that they perceive as high risk. So there's nothing these companies can do."

Hecht said he doesn't expect charters or applications for bank acquisitions from fintechs acquisitions will be approved in the near future. 

Fintech lenders have also started passing some of the rising interest rates on to consumers to make up costs, Perito said. But they have to balance that push for revenue against the risk of driving customers away  or increasing delinquencies. Perito added the holidays increase appetite for spending and using fintechs, and consumer lending is still a growing market.