How Interest Rates Actually Affect Fintech Companies
When the Federal Reserve raised rates from near zero to 5.25% between 2022 and 2023, the fintech sector split in two. Companies that had raised billions at 0% rates suddenly found their business models exposed. Others — the ones nobody had been talking about — quietly started printing money.
Interest rate cycles reveal which fintech business models are genuinely strong and which were just beneficiaries of cheap capital. Understanding that distinction matters for anyone working in, investing in, or competing against fintech companies.
The Basic Problem: Fintechs Don't Have Banking Licenses
Traditional banks have a structural advantage in rising rate environments: they earn the spread. When rates go up, banks raise what they charge on loans faster than they raise what they pay on deposits. That margin — the net interest margin — expands.
Fintechs without a banking charter cannot do this. They don't hold deposits in the traditional sense. They don't have the regulatory infrastructure to lend at scale from a balance sheet. They are, in many cases, middlemen who rely on capital markets or bank partners to fund their operations.
So when the cost of capital rises, the middleman gets squeezed.
This is not a small detail. It determines the entire trajectory of a fintech business in a high-rate environment.
BNPL Gets Crushed First
Buy Now Pay Later emerged as a category during the lowest interest rate environment in modern history. That wasn't a coincidence.
BNPL works like this: Affirm, Klarna, or Afterpay pays the merchant immediately and lets the consumer pay in installments — sometimes with interest, sometimes not. The BNPL company funds those loans by borrowing from credit facilities, securitizing the receivables, or issuing asset-backed securities.
When rates are near zero, borrowing $100 million to fund consumer loans at 0–15% APR is a viable business. When the Fed funds rate hits 5.25%, the economics collapse.
Affirm's cost of funds rose dramatically from 2021 to 2023. Their average borrowing cost moved from under 2% to over 5% in the same period their loan originations were still growing. Revenue per loan stayed roughly flat. Net revenue margin compressed.
The math is brutal: if you borrow at 5% and lend at 15% on 6-week consumer loans, you need near-perfect underwriting just to break even. Any credit deterioration — and credit always deteriorates when rates rise, because borrowers are stressed — wipes out your margin entirely.
Klarna cut its valuation from $46 billion to $6.7 billion in 2022. Afterpay was sold to Block for $29 billion in 2021; by 2023, that price looked wildly optimistic. BNPL was a product built for ZIRP — zero interest rate policy — and when ZIRP ended, the category's fundamental economics had to be rebuilt from scratch.
The companies that survived are repositioning as full-stack lenders or banking apps. The ones that were purely BNPL intermediaries are struggling.
Neobanks: Interchange Is Flat, Funding Costs Rise
The Chimes and Revoluts of the world don't primarily make money from interest. They make money from interchange — the fee merchants pay every time you swipe your debit or credit card.
Interchange revenue is relatively rate-insensitive. If your customers spend $1,000 a month and the interchange rate is 1.5%, you earn $15 per customer regardless of whether the Fed funds rate is 0% or 6%.
This sounds like an advantage. And it is — until you look at the other side of the equation.
Neobanks that hold customer deposits and want to pay competitive interest rates to attract and retain users suddenly have a problem: those deposits cost more. Chime launched a 2% high-yield savings account to compete with traditional banks; that 2% is a real cost that didn't exist when rates were zero.
Meanwhile, many neobanks had bet on offering banking services and then monetizing customers through lending products over time. The pathway to profitable lending got harder when rates rose, because credit quality among their customer base — often lower-income, credit-thin consumers — deteriorated faster than the prime borrower population.
The neobanks with clear, defensible monetization — primarily interchange — weathered the rate cycle better than those still in "acquire customers and figure out revenue later" mode. Chime remained private and profitable. Many European neobanks, still burning cash on growth, had a harder time raising at acceptable valuations.
Mortgage Fintechs: The Business Model Dies in High Rates
Mortgage fintech was arguably the category most directly destroyed by rising rates.
Better.com, LoanDepot, Rocket Mortgage, and Blend all built businesses optimized for the 2020–2021 refinancing boom. When the Fed cut rates to near zero in 2020, mortgage originations exploded. Homeowners refinanced en masse. The technology to streamline the application process had real value.
When rates doubled from 3% to over 6% in 2022, refinancing volume dropped by more than 80%. Nobody refinances a 3% mortgage at 6.5%.
Better.com went from 10,000 employees to under 1,000. LoanDepot went from a $6.3 billion IPO valuation to fighting for survival. Blend, which provided mortgage technology to banks, saw its stock fall 95% from its 2021 IPO price.
This wasn't mismanagement. It was business model fragility. Mortgage fintech required cheap rates and high volume to justify its infrastructure costs. When both disappeared simultaneously, there was no alternative revenue stream to fall back on.
The deeper lesson: any fintech that is a rate-sensitive business riding a structural tailwind is not a business — it's a bet on macro conditions continuing.
The Winners: SoFi, Robinhood, and the Interest Income Windfall
Not all fintechs were hurt by rising rates. Some were transformed by them.
SoFi is the most instructive case. Originally a student loan refinancing company, SoFi spent years diversifying into personal loans, mortgages, investing, and banking. When they received a bank charter in 2022, the timing was extraordinary.
With a bank charter, SoFi could hold deposits and earn net interest income — exactly the playbook traditional banks use to profit in high rate environments. Their net interest income surged from $116 million in 2022 to over $500 million in 2023. In an environment that was crushing BNPL lenders, SoFi's bank charter turned rising rates into a profit accelerator.
Robinhood's story is different but equally revealing. The company had struggled to find a sustainable business beyond payment for order flow, which had come under regulatory scrutiny. When rates rose, Robinhood's idle cash balances — customer money sitting in accounts — became an asset. They swept uninvested cash into money market funds and interest-bearing accounts, earning a spread. Robinhood's net interest revenue went from negligible to over $900 million annually by 2023. A business model problem was partially solved by the Federal Reserve.
Cash-heavy businesses in fintech — payment companies sitting on large float, payroll platforms holding money in transit — quietly benefited from the same dynamic. Higher rates mean cash earns more. Companies that had large cash balances or processed high payment volumes found an unexpected revenue line in their financial statements.
The Credit Cycle Problem
There is a timing issue that makes high rates particularly dangerous for consumer lenders.
When rates first rise, there's often a lag before credit quality deteriorates. Consumers who were approved for loans in a zero-rate environment look fine for 6–12 months. Then the stress accumulates: variable-rate debt payments rise, disposable income shrinks, job losses begin at the margins, and default rates increase.
This lag means BNPL and consumer lending fintechs often reported decent numbers through 2022 even as rates rose. The credit losses hit in 2023 and 2024. Companies that hadn't built adequate reserves — because their models were trained on low-rate, low-default data — got caught twice: once by funding costs, and again by rising credit losses.
Underwriting models built on 2018–2021 data are essentially useless for predicting 2023–2024 defaults. The economic conditions are different. A borrower who looks creditworthy in a zero-rate world looks different when their minimum credit card payments have doubled.
The Rate Sensitivity Map
Not all fintechs respond to rates the same way. Here is how the major fintech business models align:
| Business Model | Rate Sensitivity | Why | Examples |
|---|---|---|---|
| BNPL / consumer lending | High negative | Funding cost rises, credit quality falls | Affirm, Klarna, Afterpay |
| Mortgage fintech | Very high negative | Refinancing volume collapses | Better.com, LoanDepot, Blend |
| Neobank (interchange-heavy) | Mild negative | Deposit costs rise; revenue flat | Chime, Revolut |
| Bank-chartered fintech | Positive | Net interest margin expands | SoFi, LendingClub |
| Brokerage / investment app | Positive | Interest on cash balances; money market fees | Robinhood, Betterment |
| Payment processor | Neutral / mild positive | Float earns more; volumes stay stable | Stripe, Adyen, PayPal |
What Happens When Rates Fall?
The rate cycle eventually turns. When it does, the competitive dynamics shift again.
BNPL and consumer lending fintechs with surviving businesses get their margins back. Mortgage fintechs benefit from refinancing booms. The companies that built lean cost structures during the high-rate period emerge with competitive advantages.
But some things don't reverse. Companies acquired, bankrupted, or stripped of talent during the contraction don't automatically recover. The market share they lost to bank competitors or to the survivors doesn't simply return.
More importantly: a falling rate environment often produces the same overexuberance that preceded the last correction. Investors fund aggressive growth again. Business models that don't work at 5% funding costs get rebuilt at 2%. The cycle repeats.
The executives and investors who understand which fintech business models are structurally sound — versus which ones are bets on cheap capital — make better decisions at every point in the cycle.
Key Takeaways
- Fintechs without banking charters cannot earn net interest margin — this is a structural disadvantage versus banks in rising rate environments
- BNPL is acutely rate-sensitive because it funds short-term consumer loans from capital markets; margins compress quickly when funding costs rise
- Neobanks with interchange-heavy models are more insulated from rates, but still face deposit cost pressures if they offer savings products
- Mortgage fintech is a macro bet — the business model requires refinancing volume that disappears when rates rise
- Bank charter holders (SoFi) and cash-heavy intermediaries (Robinhood) benefit from rising rates through net interest income
- Credit quality deteriorates with a 6–12 month lag after rates rise — lenders who don't account for this get hit twice