VCs Think Rate Cuts Could Help Lending FinTechs

Are recent rate cuts good news for venture capitalist (VC) firms in the FinTech space?

A report Sunday (Sept. 29) by TechCrunch says the answer is yes, particularly for those FinTechs that depend on loans to keep cash flowing.

Those FinTechs, the report said, include companies that provide fleet cards such as Ramp and Coast, earning money on transaction fees to merchants.

“But they have to front the money by getting a loan,” Sheel Mohnot, co-founder and general partner at Better Tomorrow Ventures, a FinTech-focused company, told TechCrunch. “The terms of that loan just got better.”

The report cited the example of buy now, pay later (BNPL) firms, which were “were making money hand over fist when interest rates were zero,” as Mohnot put it.

The report also argued that while lower interest rates should help FinTech startups in the mortgage loan space, it may take some time for that to be realized.

“The refinancing wave is going to be massive, but not tomorrow or over the next few months,” said Kamran Ansari, a venture partner at VC firm Headline. “It may not be worth it to refinance for half a percent, but if rates decrease by a percent or 1½ percent, then you will start to see a flood of refinances from everybody who was forced to bite the bullet on a mortgage at the higher rates over the last couple of years.”

It may also take time for the cuts to reach paycheck-to-paycheck consumers and households, PYMNTS wrote recently, not that lower rates won’t eventually bring some breathing room to cash-strapped families.

“But in the meantime, we may see some of the entrenched behaviors of the past few months — trading down, juggling merchants, pulling back on at least some discretionary expenses — remain entrenched,” that report said.

One of the things holding back this improvement, especially in the short-term, is the credit card debt held by paycheck-to-paycheck households, who hold about 60% of that debt.

About three-quarters of consumers who make under $50,000 per year and two-thirds of consumers earning between $50,000 to $100,000 live paycheck to paycheck, so it is the folks who are not considered high earners carry much of those monthly credit card obligations. 

“At present, per the central bank’s latest consumer credit data, the interest rates assessed on credit cards stood at more than 22.7% as of this past spring,” PYMNTS wrote. “That’s up starkly from the 17% seen before the pandemic. But higher risk results in higher assessed interest — nearly 30% for those cards held by borrowers with below super prime scores.”