A flock of fintech companies hit the public markets this year, exciting investors with their ability to leverage technology, data, artificial intelligence, and machine learning to better serve the financial needs of customers. The year was filled with huge run-ups of fintech stocks like Upstart Holdings, Affirm Holdings, and SoFi Technologies, as well as lots of volatility that has ultimately led to a broad sell-off in the sector as the year winds down.
Investors have been intrigued by this new batch of players but also have been left with questions about evaluating the technology powering these innovative companies.
So I caught up with Dan O'Malley, the chief executive officer of Numerated, a private fintech that creates and distributes technology to help banks and credit unions more efficiently lend to businesses. Numerated's platform uses data to streamline the entire business lending process, from application to decision to close. More than 500,000 businesses have leveraged the Numerated digital loan-origination system to process more than $50 billion in business loans.
Numerated is next thinking about expanding the use of its technology to help financial institutions lend to consumers. I asked O'Malley to discuss the technology behind fintech companies and fintech trends to watch in 2022.
Bram Berkowitz: In general, what do you think are the most important metrics that investors should be looking at when trying to evaluate these new and complex companies?
Dan O'Malley: There are really two kinds of fintechs that are going public today. The first camp is fintech issuers. These are fintechs that issue loans and accounts directly to borrowers. You'll often hear investors refer to these fintechs as neobanks, or alternative lenders.
In the second camp are fintech SaaS [software-as-a-service] companies. These are companies like Numerated who provide technology to banks and credit unions so they can better compete against these neobanks and alternative lenders.
Dan O'Malley, CEO of Numerated. Image source: Numerated.
Each camp will have different metrics that they use as key indicators of success. Regardless, customer experience is a key differentiator in both camps. Today, the best tech wins, and it's important for investors to understand who is able to deliver the best experience for customers.
For fintech issuers, that shows up in high growth rates. For fintech SaaS companies like Numerated with enterprise sales cycles, customer retention is the key indicator. You want to find fintechs that are acquiring lender customers and showing that their tech is sticky and high value. Experience matters for our institutional customers, too. We see banks that are able to provide the best lending experience winning in their markets.
Berkowitz: Investors that do not have a background in machine learning or artificial intelligence are trying to figure out which companies have the best technology. What are the metrics that investors can use in public documents to try to evaluate technology? Do any stick out as more important than the rest?
O'Malley: You can't look at a single metric to evaluate fintech issuers. You have to take their metrics in the context of their strategy, and specifically where they want to play on the risk-reward curve. You want to invest in issuers that are on the efficient frontier. That's where the value of the technology will show up: The fintech will be able to deliver a better return than others at the level of risk they have chosen to accept.
It's worth noting that the value of the technology is not limited to machine-learning models for risk management. Fintechs that are able to deliver a superior customer experience are able to charge higher rates and deliver a better return. We see this in our financial institution customers. After deploying the Numerated experience, they are able to command a premium on their loans because of the rapid, easy delivery of capital they can then provide.
Berkowitz: What fintech trends will you be watching in 2022?
O'Malley: I think 2022 will be an exciting year for fintechs and financial institutions alike. We've got a number of trends we're watching at Numerated, but I'll give you three off the top of my list:
- In 2022, the line between bank and fintech will be almost indistinguishable. There are two trends at play here. For one, banks and credit unions are digitizing their business-lending experience. Fintechs, on the other hand, are applying for charters and becoming regulated banks. The result is more digital options than ever before.
- Partnerships will proliferate. Here, we're expecting to not just see banks and credit unions partner with fintechs to better compete in an increasingly digital marketplace, but we also expect to see more fintech-to-fintech partnerships that allow vendors to provide even better tech to their customers.
- Business lending will become the new battleground. We expect the spotlight to shift from the retail side of the bank, focused on consumers, toward the business-lending side. As neobanks and alternative lenders get more aggressive in the business-lending space, we believe traditional financial institutions will adopt new technology to fight hard to keep this market share, which is core to their business.
