Noteworthy trends from Principal Finance Group's latest pipeline review

Leonard Losquadro | Director, Principal Finance Group

June 27, 2024

3 min read

Cross River’s Principal Finance Group witnesses evolving trends in the industry and operates from a unique vantage point.  

We continuously gather valuable insights about the innovations that are reshaping the future of financial services and technology – based on recent conversations with some platforms, here are some important shifts we see emerging:    

Collateralization & personalization in consumer segment  

Collateralization has become an upward trending component of recent trades. We are seeing platforms leverage traditional & esoteric assets for buoyancy in an uncertain time for the consumer sector. This strategy allows early-stage fintechs to protect their portfolio recovery in a downside scenario and mitigate credit losses. Ripe businesses in this segment have a few common characteristics – those that we have engaged with are typically venture backed, have less than 2 years of data, and originate under $500mm annually.  

Our group finds the intersection of asset security and legacy consumer credit products to be a novel approach to growing an unrated portfolio.

While we consider a variety of assets, some of our potential platform partners focus on vehicle equity, jewelry, home energy, water systems, and collectibles. Through this expansive list we see a path forward in improving financial inclusion across the board, specifically for individuals excluded from traditional credit products. We expect this trend to continue and to open up new markets for lenders and credit investors.  

Growth of embedded finance in small business  

Embedded finance is rapidly transforming how financial services are delivered. While the model was conceptually launched to support consumer segments, embedded finance has gained traction in the B2B space.  

We are speaking with platforms that are thoughtfully integrating credit solutions for vertical SaaS companies to transform customer experiences across software sales, e-commerce, & procurement solutions.

This trend is fueled by the desire to enhance user experiences by providing seamless access to credit within standard, industry specific, SMB workflows. For example, by introducing credit products alongside accounts payable tools, businesses as well as their lending partners are well positioned to capture a broader market share and efficiently address borrower cash flow constraints. This is a win/win for all stakeholders involved.  

From a macro-economic perspective, this model also provides safeguarding in moments of economic downturns. Recall when small businesses were left underserved by the traditional banking system following the turmoil in early 2023. With an upward trend of embedded finance integrations, SMBs will be able to leverage an increasing number of solutions should another crisis arise in the future.  

Eliminating single point of failure risk  

In the past 18 months, the waters for debt capital have become choppier for specialty finance and fintech platforms.  

An underlying theme across all inbound requests has been the desire and need to diversify funding sources.

Management teams are focused on strengthening multiple financing options to mitigate the risk associated with a single point of failure. By diversifying funding sources, platforms shield themselves against uncertainties and potential disruptions that may arise from depending on a single lender. This approach more than likely ensures uninterrupted access to capital in times of market fluctuation, regulatory changes, or institutional challenges. It’s worth noting that meaningful opportunities for platforms seeking alternative funding are arising from incumbent junior and mezzanine position lenders.  

The above trends highlight our current dialogues with platforms, investors and co-lenders. The fintech lending landscape is evolving at a remarkable pace, driven by technological advancements, regulatory changes, and shifting consumer/commercial expectations. By staying attuned to real-time market data, lending institutions can better position themselves to capitalize on emerging opportunities and navigate the challenges of this rapidly changing environment.  

As we continue to support fintech businesses, we remain committed to fostering innovation and inclusivity in the financial sector.  

Stay tuned for more insights.