A new report from business data API provider Codat shows that business lenders continue innovating and evolving their offerings despite current economic challenges. The study of 115 business lenders in the United States and the United Kingdom shows providers are adapting their strategies and priorities to narrow in focus on operational efficiency, retaining current customers and launching new lending products.
Tumultuous economic conditions are hitting non-bank lenders hard, with 79% reporting that the economy has hurt their operations, Codat found. Digital lenders are seeing a rise in default rates (41%), and are tightening lending standards to manage risk.
As a result of the current economic conditions, growth is becoming increasingly difficult for lenders, with the main barriers to growth being reduced customer demand (22%), competition from established players (19%), the inability to raise additional funds (19%), and a lack of product-market fit (19%).
Despite these obstacles, Codat learned that some lenders still see new growth opportunities. One in five lenders plan to expand to new geographies, 17% plan to expand their teams next year, and 40% say their business has grown over the last 12 months.
Mark Zuckerberg said efficiency would be the management theme for Meta in 2023, but it’s turning out to be a theme across the technology sector. In response to these economic challenges, 64% of the non-bank lenders surveyed say efficiency is a top priority. To achieve this, most lenders focus on three strategies: improving customer retention, reducing business costs and lowering defaults.
In the United Kingdom, 36% of respondents said they were looking to reduce default rates by using data better. In the United States, 34% plan to do the same and improve internal processes to reduce underwriting and loan serving costs.
“There’s been dramatic changes for entrepreneurs over the last several years,” said Tui Allen, vice president of product and design at Ampla. “And we’ve seen traditional banks, even fintech, not always keep up. We’ve worked quickly to evolve with our customers, moving from a single lending solution to a platform that facilitates payments across the consumer brand ecosystem via digital banking, bill pay, insights, and corporate cards to our customers – all in the last 18 months.
“Our partnership with Codat allows us to take a full 360-degree view of our customers’ business as we evaluate them, including eComm, wholesale, retail, and marketplace data, which is so important as brands move to a more omnichannel strategy.”
Regarding product strategy, lenders aren’t shying away from making changes, as 36% look to launch new lending products in response to market challenges. With non-bank lenders at a disadvantage compared to incumbents, providers are adapting how their credit products are structured and presented to establish a stronger product-market fit, which 19% said they were struggling with.
Lenders are making changes to their target market. Industry specialization is rising as lenders focus on verticals with strong demand, making customer acquisition more cost-effective and appealing to specific markets. Lenders are honing in their market focus by targeting larger businesses (31%), specializing in lending to particular industries (38%) and moving away from segments where they have low product-market fits (35%).
While the high-interest rate environment has strained non-bank lenders, they remain optimistic about their future, as evidenced by investments in geographical expansion, hiring, and reducing burn rate to shore up business in the short term.
“From conversations with our business lending clients, it’s clear that parts of this segment are demonstrating impressive resilience.” commented Ed Sherrington, head of product for banks and lending at Codat. “Rather than reducing their appetite to experiment with new ways of working, many are leaning in to address increased levels of risk and a greater need for efficiency by making better use of data. The market is challenging, but we’ve seen digital lenders with a tightly defined target audience and clear differentiation continue to thrive despite headwinds.”
