The Apocalypse That Never CameBy Adrián Fernandez de Mendoza | Mon, 09/14/2020 - 08:00
It comes as no surprise to anyone and is even somewhat repetitive now to talk about the pandemic and the known and unknown future impacts it is having on our personal and family finances. Loss of employment, reduction in wages, reduced business activity. None of this is new to anyone. We know that it has already impacted us at the macro and micro levels, but the shock on the future remains to be seen.
Many financial institutions, after witnessing this economic tsunami that started in Asia, impacted Europe and finally landed in Latin America, prepared in various ways, from tighter credit policies to extension programs for their customers that in some cases reached up to four months of "grace" (yes, in quotes, since many programs focused more on showing healthier financial statements of the Banks, and capitalizing the unpaid interests of the customers). All of us players, big and small, traditional or fintech, took a deep breath and expected the massive hit of this cursed virus that we were not prepared for.
And finally, it came: slowdown in origination, restrictions on withdrawals from credit lines, customer unhappiness and much more. The tension was high as people and businesses watched in horror amid GDP projections, mass layoffs and empty streets, except for the occasional tamale vendor who brought more hope than product to sell. A social and economic apocalypse as we witnessed how the daily indicators of cash flow, collections and variable costs had a negative impact on the life of our company, customers and employees.
April, May, June. They were nothing but a blink of an eye. A painful blink, indeed. Calls from customers started to arrive and asked us if we offered a "COVID-19 program." More hassles from customers who would not be able to access their credit line. Overall frustration. And everyone waiting again for the collapse of our business metrics that were going to give a small “heart attack” of our corporate team back in Europe. Waiting, waiting, and waiting, while we held our breath.
And as we waited for disaster, we began to see more stable and upward collections. Customers accepting their credit line, but reducing the amount available. Portfolio indicators were stronger than ever amid tireless calls from corporate asking when doomsday was. And it wasn't coming. We kept scratching our heads trying to understand why this virus that wiped out entire economies had not had the expected impact on Creditea. "We are missing something", I thought. A few calls with some of our competitors, and the response was the same. Nobody saw the massive hit. Clueless; that was the word I used with the CEO in Europe.
Then we began to understand that although this positive effect was not so easy to comprehend, it was real. I finally broke it down:
- Fast reaction: The advantage of being a fintech company is the speed with which we can adjust our credit and origination policies. We were able to respond in a matter of days, while the robustness of traditional players in the financial sector resulted in a slow response time. Before the "wave" came, we were able to "dive in" quickly and didn't get "rolled over" as we had expected.
- Customers being cautious: It is not the first time that Mexico has experienced a crisis that comes hand in hand with lowering the available credit supply. People remember the bad times and start being more prudent with their financial products. Customers who applied to Creditea began paying more promptly and to ask for smaller credit lines. There have, of course, been some cases that presented themselves with job losses, wage reductions or simply refusals to pay.
- Mexico can't stop: I don't want to turn this into a health, public policy or community-care debate, but as Mexico is a hybrid economy, where a high percentage of families generate their income through the informal economy, it's practically impossible to stop it. The quesadillas lady, the catalog seller and the small convenience store continued to move the wheels of the economy with questionable sanitary precautions, as the privileged few began to set up for home office. I read somewhere that people would rather risk "5 percent getting the virus and dying, than 100 percent certainty of starving to death if they stayed home”. Disturbing but true.
I’m positive we haven't seen the end of these unprecedented times and mostly we will continue to be surprised and challenged. There are tons of lessons for both individuals and companies to apply to whatever lies ahead. No one is to blame for this, but we are all responsible to make the best of it.
We will have to redo the risk, origination and money-recover models because there is no AI or machine learning model that could have foreseen this and most of all, there is no model that could have predicted all this turmoil that caused “nothing” for some and a lot to others. Nothing is off the table now and that’s exciting.