For our last post of the year, I thought we would do something a little different. I reached out to the CEOs of every major consumer lending fintech to ask for commentary on 2024. Most responded to me and there were some really interesting points to consider for everyone as we enter the new year.
I asked three key questions. The first one was about 2024 initiatives at each company, the second was about responding to a prolonged period of high interest rates (I am not convinced the Fed will move interest rates down aggressively in 2024) and lastly, I asked an open-ended question about the challenges facing the industry in 2024.
These answers will make some excellent holiday reading for you as we head into the last weekend of 2023.
Editor’s note: This article has been updated with commentary from Scott Sanborn of LendingClub.
Question 1: What new initiatives are you going to be focused on in 2024?
Renaud Laplanche, CEO of Upgrade: First taking a step back, 2023 at Upgrade was all about product innovation, process improvement, security, and scalability. As a result of that focus, we launched an auto lending platform, a suite of home improvement financing products, we acquired a BNPL company (Uplift), and just launched a very innovative secured credit card: Secured OneCard. As 2023 was a “new product launch” year, 2024 is going to be about getting these new products to scale and making them work well together for the greater benefit of our 5 million customers.
Mike Cagney, CEO of Figure: We are standing up a blockchain native private TBA / passthrough marketplace for private credit. Today, the only real loan-level liquidity is in the agency (GSE) market. Non-GSE private credit is sold in one-off, bespoke loan purchase agreements into illiquid pools. This limits the amount of production a non-bank originator can do, given volatility in the capital markets. We’re using a standardized loan origination system to construct homogenous assets across originators. We’re working with major banks to stand up a TBA market, where originators can sell production forward with guaranteed takeout. And we’re capturing the benefits we’ve accrued in public blockchain from origination to aggregation to securitization. While we started this effort with HELOCs, we’re expanding this effort out to other asset classes in 2024.
Dave Girouard, CEO of Upstart: We’ll focus first and foremost on improving the AI models that power Upstart’s lending partners. AI has gone mainstream and there’s finally appreciation that it will change financial services forever. We’re focused on unlocking the potential of AI so that forward-thinking banks and other lenders can turn it quickly into a massive competitive advantage. As part of this, we expect to release an AI certification program aimed at helping financial services executives develop the skills and knowledge they’ll need to lead their institutions through this transformation. While much of Upstart’s innovation in the past has focused on credit origination, we’re now building an equally innovative platform for loan funding. We see opportunities to create enormously scalable funding structures with alignment, appropriate risk sharing, and durability throughout economic cycles. This doesn’t exist in the market today but we’re confident it will.
David Kimball, CEO of Prosper: We will continue to invest in expanding our product set, and we will expand the features of our existing personal loan, credit card, home equity, and retail investor products. While we have been using AI in our business since 2015, next year we will transition some of our generative AI tests into production, creating a more personalized experience for our customers.
Paul Ricci, CEO of Best Egg: In 2023, we brought several new products to market, including our rapidly growing auto-secured loan and our flexible rent platform. Both expand borrowing options primarily for people with limited savings. In 2024, our top priority will be scaling those products, offering flexible lending solutions to more customers than ever, and connecting our products to create a seamless user experience. We will focus on integrating each product’s digital experience, launching a cross-product mobile app, and developing a decision engine that optimizes offers and content tailored to our customers’ needs. As consumer debt grows and more and more people are driven to live paycheck-to-paycheck, Best Egg will continue to invest in financial health. Our financial health tools – specifically our credit manager, money manager, and debt manager – are essential in helping people with limited savings understand their financial situation and feel confident in the solutions that they lay out for themselves. Best Egg is poised to capitalize on these trends and help people be more confident about money in 2024.
Raul Vazquez, CEO of Oportun: We recently announced a significant expansion of our secured personal loan product to approximately 40 states through a partner bank. Responsibly expanding secured lending, collateralized by members’ autos, will allow us to better serve those who need larger loans while reducing credit exposure for Oportun. Through the third quarter of 2023, annualized net-charge offs for secured personal loans were over 300 basis points lower than for unsecured personal loans.
Joe Heck, CEO of Happy Money: In the broader economic environment, 2024 should be a year of settling into a new normal – high(er) rates, tight(er) liquidity, and focus on fundamentals. For Happy Money, we’re focused on designing scalable, nimble infrastructure that creates simplicity for our members, partners, and employees. We’ll continue to innovate on risk as the need we serve – credit card debt elimination – has been exacerbated by the macro environment.
Brad Stroh, CEO of Achieve: In 2024, one of our key strategic priorities is to continue our multi-year digital and brand transformation to deliver personalized experiences for consumers and our members dealing with debt burdens. We know that many consumers are facing peak debt driven by high interest rates, soaring prices and in many cases, the restart to paying off student loan debt. We want to help American families better understand their individual financial situation with more transparency and to understand their options for debt consolidation. For Achieve, we’re launching some very cool digital tools with debt pay down scenario planning, apps focused on doing-it-yourself debt optimization / budgeting, and enabling digital enrollment to give consumers choice in how they engage with us. We’re also going to continue to focus on driving innovation with a specific focus on AI. In 2023, we hosted a great hackathon with over 40 teams participating to ideate on AI and ML initiatives that can help our clients and our agents. More to come, but we want to keep being as entrepreneurial as ever with peak demand for our products.
Tom McCormick, Co-CEO of BMG Money: Today, we think about Open Banking and Open Payroll as two segments. They will converge, and a more integrated Open Finance ecosystem will allow fintechs to act decisively with confidence in the breadth of information available to them. We work with great partners on these solutions, and in 2024 we will continue to collaborate with them to refine their offerings in light of our customers’ needs.
We’re better prepared than most to seize on the historic opportunity when rates stabilize. Our total addressable market has never been bigger. We’re seeing record high outstanding revolving consumer credit which is over $1.3T and record high credit card interest rates (an average of 21.2%). We are laser-focused on enhancing our features and member experience to capture that massive TAM. Additionally, we are building out our mobile engagement platform including servicing, debt monitoring and management in the app which will give members a way to track, prioritize, and optimize debt payments, especially credit card payments, which will be of significant value to the LendingClub member. We will also continue to roll out the first generation of a line of credit productthat allows approved members to easily sweep accumulated credit card balances into fully amortizing payment plans. This paves the way for a revolving line of credit product in future years and builds on the proven performance we’ve seen from repeat members.
Question 2: What strategies are in place to ensure resilience in a prolonged high interest rate environment?
David Kimball, CEO of Prosper: We will continue to emphasize long term sustainability over near term growth, which didn’t have a lot of street value until this year. We have focused on diversifying our marketplace investor base, delivering consistent credit performance, expanding our product set, investing in our technology platform, and ensuring positive unit economics. More recently, as investor return requirements have increased, we have increased the coupon and the resulting yield on the personal loan product.
Brad Stroh, CEO of Achieve: First, we’ll continue to develop and hone our relationships with our members and our prospects to keep Achieve top of mind, meeting them where they are with solutions that fit their specific needs. We’ll also continue to personalize our underwriting and focus on being more responsive to situations that shift with the economic environment. We’ll also continue to tighten our credit standards and will focus on balancing credit with investor demand to maintain the resilience of our capital partner networks. It’s very clear that we’ll need to focus on building relationships with longer term investor partners to provide more stability and growth to our business, now more than ever with continued disruption in investor demand and capital markets.
Tom McCormick, Co-CEO of BMG Money: Net interest margins are lower than in recent years. So, to ensure that our risk-adjusted returns continue to thrive, we need to consistently improve our credit risk management abilities. As an industry, we are not even in the first inning of the use of employment, cash flow, and transactional data in the service of underserved consumers and the establishment of sustainable, responsible new lenders and models. We intend to continue to lead in this emerging category.
For Oportun, managing those top two issues during 2023 meant a significant reduction of our cost structure and reprioritization of strategic initiatives. – We reduced annualized run rate for operating expenses by approximately $100M in 2023 and committed to delivering another $80M in annualized reductions in 2024, bringing our quarterly run rate to $105M as we exit next year. – Oportun holistically addresses two of the most fundamental challenges to financial health and resilience – access to responsible and affordable credit, and adequate savings. Accordingly, we are focused on our core unsecured personal loans, secured personal loans, and savings products. – As a result of our focus and prudent expense management, we also achieved a post-IPO record for adjusted operating efficiency in the third quarter.
Dave Girouard, CEO of Upstart: Lending will always be a rate-sensitive business, so rule number one is running a fiscally and operationally tight ship while continuing to invest in the technology. We’re also working hard to grow our newer products that are less sensitive to high interest rates – such as auto retail lending. In fact, our newest product, a HELOC, actually shines in high rate environments because it allows borrowers to draw on the equity in their homes without refinancing their mortgage. Diversity of products and borrowers is critical to thriving regardless of the prevailing interest rates. We continue to increase our investment in tools like the Upstart Macro Index and PTCC that help our lending partners and credit investors better adjust their lending programs to changes in the macro environment. We want to create an AI-enabled toolset for lending so compelling that banks will be reluctant to lend any other way.
Mike Cagney, CEO of Figure: Higher rates are good for our product – outside of their impact on DTI. We’re working on solutions – like direct payoff – to mitigate DTI constraints.
Renaud Laplanche, CEO of Upgrade: While interest rates might remain high by historical standards, we believe we’ll see several rate cuts from the Fed in 2024. High rates aren’t necessarily a negative for Upgrade or Fintech consumer lending platforms in general, as both supply and demand adjust to the higher rate. The headwind that impacted the industry in 2023 was the rapid rise in interest rates, and the expectation of rising rates, which caused some loan buyers to remain on the sidelines as they were waiting for rates to reach their apogee. As there is now little chance of future rate hikes, we’re already seeing greater loan buyer appetite without having to wait for rate cuts necessarily.
Paul Ricci, CEO of Best Egg: Efficiency has always been one of our core strengths at Best Egg. Still, as borrowing costs continue to climb, we must focus on running a lean and efficient operation across marketing, servicing, and overhead while ensuring we can continue to innovate for our customers. We’re also excited about our home-secured and auto-secured installment products. They allow us to make offers to more people and lower the interest rates on those offers because people can use fixtures in their homes or cars for collateral.
Joe Heck, CEO of Happy Money: At Happy Money, we have always designed around members and their needs. As credit card balances push above all time highs (again) and rates increase, the “debt treadmill” only seems to be accelerating. Our mission is more important than ever as we design a happier way of lending that helps borrowers achieve their goals and helps credit unions achieve greater impact. This year we partnered with TruStage to launch Payment Guard Insurance, which is a great example of supporting resilience for lenders and consumers alike. It’s a win-win-win: • Win for the Member – Reduced stress in an uncertain macroeconomic environment, giving them payment confidence. • Win for the Credit Union – Strengthening of the asset’s performance. • Win for Happy Money – Happier lending, by design! Focus on where the member is at today, and how we can help design the loan to decrease the stress that debt brings to their lives. We’ll continue to look for innovative ways to bring risk down for our lending partners, produce great outcomes for our members, and promote a “happier by design” lending environment.
We’re managing the business for the long-term. In this environment, we’ve leaned into our bank capabilities as our marketplace has faced near-term headwinds and have built unique capabilities and new structures to better serve investors and LendingClub in today’s environment. For example, in addition to whole loan sales and loans held for investment, in 2023 we launched our Structures Loan Certificates (SLCLC) and extended seasoning programs. For SLCLC, marketplace investors earn compelling levered returns with low friction and low-cost financing on a liquid security, and LendingClub earns an attractive yield with remote credit risk on the Senior Note. We intend to continue using our bank capabilities in 2024 to provide financing through these structures which has brought asset managers back to the table by using our bank balance sheet to provide financing. Additionally, we’ll continue to be very disciplined on credit where we have been outperforming the industry for more than 2 years. And we will continue to deliberately move up coupons to match the rate environment to ensure compelling returns for loan investors. We also intend to remain profitable. Our bank remains capitalized well above thresholds, strong cash and liquidity, an 86% fully FDIC-insured deposit base, with minimal exposure to securities. Lastly, we’ll continue expense management while slowing down discretionary investments until the macro environment changes.
3. What is the top issue for the consumer lending industry in 2024?
Paul Ricci, CEO of Best Egg: Looking to 2024, I see two issues impacting the consumer lending industry. First, consumer debt at high-interest rates continues to grow. While this will drive demand for Best Egg’s products and create opportunity, it will likely generate a headwind on credit quality that we must stay ahead of. Second, we must continue working with regulators to ensure fair and transparent credit is available to consumers. I am seeing an increasing amount of regulatory friction. We must ensure that results in common sense risk management, safety, and soundness in the industry while prioritizing favorable consumer outcomes.
Raul Vazquez, CEO of Oportun: The top issues for the consumer lending industry continue to be elevated interest rates and managing credit quality.
Dave Girouard, CEO of Upstart: Banks have been retreating from consumer lending for a long time – starting with mortgages – and we expect this trend to continue. We want to help our bank partners serve their customers with the products they demand, but in ways better aligned with their core business model. Banks aren’t designed to take on significant risk – that statement has never been more true than today. At the same time, there’s unlimited opportunity to innovate on funding structures outside the banking system that can serve borrowers up and down the credit spectrum. While it’s impossible to deliver a particular return reliably year in and year out, it’s quite possible to deliver a compelling long-term return on capital that accommodates changes in the macro.
David Kimball, CEO of Prosper: A top issue for the industry is the ability for the consumer to continue to deal with prolonged high interest rates and increased housing and goods prices after depleting their personal savings.
Joe Heck, CEO of Happy Money: 2023 felt like a year of survival, not one of thriving, for everyone in the industry – banks, credit unions, fintechs, and consumers. Things changed fast (i.e. SVB collapse, Fed funds rate increases), and it was the teams that reacted quickly and had nimble cultures that survived. Looking to 2024, we’ll likely not have much more operating certainty than 2023, so managing the volatility, staying focused, and picking opportunities as they emerge will require discipline and fortitude. To be more direct, I think the top issue will be maintaining focus and managing smart growth while building edge and innovation in risk management.
Renaud Laplanche, CEO of Upgrade: Credit performance is going to remain in focus: delinquencies have risen throughout 2023 as many consumers felt the impact of higher inflation and higher cost of debt, due to higher rates. Moving into 2024, the higher rates will likely slow the economy down: whether it ends up being a soft or hard landing remains to be seen, but there is little doubt that it will be landing. That means higher unemployment, and possibly higher delinquencies still. The resumption of student loan servicing is also going to be a factor. We will be monitoring credit performance very closely to determine whether these factors are offset by lower inflation, and possibly lower interest rates as the Fed starts cutting rates. In the meantime, we have significantly tightened credit and believe we are well positioned for any reasonable economic scenario.
Tom McCormick, Co-CEO of BMG Money: When the Fed starts making interest rate cuts in 2024, it will be tempting for fintech lenders to (incorrectly?) assume that the days of a sustained zero-interest rate policy have returned. Don’t loosen credit standards based on projected fat margins that may not materialize. On this issue, if your origination strategy allows you to move fast, it will be better to be a little late to the party than to show up early to a party that never happens.
Mike Cagney, CEO of Figure: Unclear if it’s credit, rates or regulatory – but certainly most likely the latter for those of us in the public blockchain space.
Brad Stroh, CEO of Achieve: This marks the second quarter in a row with credit card balances above $1 trillion. It also continues a trend of credit card debt increases, with balances rising by $223 billion since the fourth quarter of 2021. With the pressure of peak consumer debt that is compounded by high interest rates, suppressed borrowing options due to tightened credit, we forecast delinquencies to rise. We’re predicting more economic pressure coming in 2024, so we’re proactively being thoughtful about lending, credit, pricing and investor demand. While the larger industry will face rising delinquencies and continued disruption in credit markets, for us at Achieve, the top issue will be the ability to provide more personalized solutions to people experiencing debt challenges to get them back on track faster. By using AI and data-driven credit models, human expertise and innovative digital tools, we can help consumers navigate the myriad solutions available to them to select the one that fits their individual needs. We think being a multi-product solution platform remains the right strategy and we’re seeing our digital investments payoff; but 2024 will have its own challenges so we want to balance growth with resiliency while serving our member clients. We’ve been doing this for 20+ years, so we know how to be responsive while sticking to our long term vision.
Funding costs: For non-bank marketplace lenders, the temporary but material pullback of bank and credit union buyers means that the cost of capital will remain high and put continued pressure on margins. Given the difficult fundraising environment, we could see capitulation and mergers with perhaps more platforms going to asset managers (vs. banks). (We acknowledge that the recent Fed comments are helpful in this regard but 1) they haven’t materialized yet and 2) no one is predicting a return to significantly lower rates anytime soon.) Credit: There are some signs that the inflationary pressures are subsiding but the macro outlook remains uncertain. At LC, until the direction of unemployment is clear, we plan to remain conservative on credit and continue to monitor how consumers adapt to higher inflation and cost of capital (e.g. cost of credit), as well as how our underwriting will need to adapt.
I hope you found that roundup of thoughts from consumer lending fintech leaders useful. Thanks for being a Fintech Nexus reader, we will be back in 2024 with more great content for you. Enjoy your holiday weekend and Happy New Year!
Peter Renton is the chairman and co-founder of Fintech Nexus, the world’s largest digital media company focused on fintech. Peter has been writing about fintech since 2010 and he is the author and creator of the Fintech One-on-One Podcast, the first and longest-running fintech interview series.