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Higher-for-longer interest rates threaten fintech

Many of these fintech companies took off during the pandemic, when interest rates were low and potential customers were flush with cash from built-up savings and government stimulus programs. (Photo: iStock)
Many of these fintech companies took off during the pandemic, when interest rates were low and potential customers were flush with cash from built-up savings and government stimulus programs. (Photo: iStock)

Summary

Shares of Affirm, Block and PayPal fell the day after the Fed announcement.

The Federal Reserve’s message this week that higher rates are here to stay doesn’t sit well with fintech companies.

The Global X Fintech ETF fell about 3% on Thursday, a day after the Fed signaled it was open to another rate increase this year. It closed at its lowest since May, according to Dow Jones Market Data.

Shares of the buy-now-pay-later company Affirm dropped 8%. Block, which owns a buy-now-pay-later company called Afterpay, dropped 4%.

PayPal and popular trading app Robinhood both fell 4%. Opendoor, an online house-flipper, dropped 14%.

High rates are a threat to fintechs for two main reasons. The rate increases are meant to slow down the economy, which is putting pressure on consumers—especially those at the margins who are often more likely to seek out a fintech lender instead of a bank. What’s more, the companies’ own borrowing costs are rising as broader rates increase, squeezing their margins and threatening to put smaller players out of business.

Many fintechs performed well earlier this year, boosted by investors’ hopes that high rates might soon peter out. But with the Fed’s announcement this week, many investors seemed to finally get the message that that isn’t going to happen soon.

“Higher rates for longer are bad for emerging industries like fintech," said John Hecht, an analyst at Jefferies, which has a sell rating on Affirm. “There will eventually be a consumer consequence where consumption will slow, defaults will move upward. Generally speaking, it’s gonna be a tough go."

Higher interest rates also give investors more options for safe places to earn yield. That makes them less willing to take on riskier bets such as buying stocks of relatively unproven companies.

Many of these fintech companies took off during the pandemic, when interest rates were low and potential customers were flush with cash from built-up savings and government stimulus programs. But that was before the Fed raised rates 11 times beginning in early 2022, its most aggressive campaign in decades.

The economy remains strong by many measures, including consumer spending, but the continued high rates are hitting many borrowers hard.

Companies are looking for ways to cope. Buy-now-pay-later companies such as Affirm are being pickier about which customers to extend credit to. They are also trying to unload some of their risk. For example, Affirm is asking some shoppers to put up bigger down payments or shortening the length of shoppers’ payment plans. Affirm is also asking merchants to shoulder more of the cost if they want to offer a shopper a 0% interest plan.

Investors have increasingly demanded higher yields on the debt they buy from these companies.

Affirm’s recent securitization this month priced at a weighted average yield of 7.3%, or roughly 1.27 percentage points more than the securitization deal a year prior, according to Finsight.

An Affirm spokesman said that the company’s most recent securitization deal in September was upsized from $500 million to $750 million—a record high for the company in terms of offering size—because of demand.

Buy-now-pay-later companies offer payment plans that let shoppers split the cost of sneakers, furniture and concert tickets into installment loans. The companies point out that their late payments and related losses are still low. They say their ability to take in real-time data about each shopper and merchant helps them make smart decisions about extending credit.

Zip, a buy-now-pay-later company based in Australia, is shrinking itself to save money. It sold its businesses in Central and Eastern Europe, South Africa and the Middle East this year.

It also recently laid off 20% of its workforce. “These decisions are never easy, but necessary for Zip to deliver on its strategic priorities," a spokeswoman for Zip said.

Write to Angel Au-Yeung at angel.au-yeung@wsj.com

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