The world is bracing for a recession, with the latest data showing three quarters of economists in the U.S. expect it to occur by the end of 2021.
If those predictions prove true, it will be the first major economic downturn for some of the nation’s leading fintechs. Born out of the ruins of the recession, these startups have enjoyed nearly a decade of success buoyed by strong economic growth, a bull run in the stock market and low unemployment.
But with the economy in the late stage of the economic cycle and with concerns mounting that a recession is on the horizon, some are questioning the resiliency of fintechs and their business models. It’s particularly true for the ones lending to small businesses.
Earlier this month the National Federation of Independent Businessessaid small business confidence fell to its lowest level since President Donald Trump won the election in December. If business owners start worrying more, they’ll curb investments and borrow less.
But Kathryn Petralia, president, and co-founder of small business lending platform Kabbage isn’t deterred. She said her business is ideally suited to weather an economic downturn if it were to happen and that small business confidence among Kabbage’s sector of the market is humming along. Kabbage caters to all sizes of small businesses with some clients borrowing as little as $2,000 to as high as $250,00. It offers a line of credit, unheard of in the small business market, but is willing to take on the risk because of the data it uses to underwrite its loans.
“The thing about small businesses is they are always stressed for more time and they spend a lot of it on cash flow management, which is more volatile than larger businesses,” said Petralia. Kabbage has grown accustomed to this over the last seven years and is adept at spotting any potential issues before it’s too late. Its real-time data goes beyond a customer’s credit score to include customer’s bank account, bookkeeping software and payment processing data. Kabbage underwrites lines of credit of up to $250,000, with the online application taking ten minutes. It’s open to businesses that have been operational for a year and have a minimum of $50,000 in annual revenue or $4,200 per month during the past three months. “The data is getting updated every day and every time the customer logs on. The data connectivity allows us to monitor signals so we can dynamically adjust lines of credit to match our customer’s seasonality and those same signals can be monitored in a downturn,” said Petralia. The executive pointed to Advanta, the largest business credit card provider that went under in 2010 after more than 20% of its loans went into default. The recession played a role in its demise but also the credit score data didn’t trigger any red flags until it was too late. “The credit score is a lagging indicator. It’s really a great example of the advantage with leading data indicators,” said Petralia.
But Kabbage isn’t resting on its laurels when it comes to using data to spot any signs of a downturn. Last spring it acquired Orchard Platform Markets, a provider of small business lending data. The company, which is backed by former executives at Citigroup and Morgan Stanley, provide data on the marketplace lending sector. Petralia said Orchard had a lot of pre-recession small business data it’s using to augment the models it developed internally to spot any signals of a recession.
As for how the market will fare for the remainder of the year, Petralia predicts an uneventful period barring a huge event that sends the economy into a tailspin. “We’ve had so much growth. We can’t maintain that trajectory,” she said. “It makes sense that it levels out for a while and maybe we don’t get that dreaded downturn that everyone is excited about.”