Happy Sunday,
Fed rate hike pace slows – but will continue. Consumer spending falters. Custodia’s master account bid blocked. CFPB announced proposed credit card late fee rule. Stripe looking to raise $3Bn at substantial valuation cut. Sunstone and Moov raise rounds. Marqeta makes an acquisition. Layoff watch: PayPal, Upstart, BM Technologies.
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Fed Rate Hikes Slow
Last week, the Fed slowed its pace of rate hikes, increasing its benchmark rate by just 0.25 points. Notably, Fed Chair Powell acknowledged an improvement in inflation, but signaled rate hikes aren’t over yet, saying: “We can now say for the first time, the disinflationary process has started…The job is not fully done.”
Despite heavy media coverage of layoffs in tech and banking, the economy continues to add jobs, though at a slower pace. ADP’s report showed a growth of 106,000 jobs in its private payroll report. Most of the growth came in the hospitality industry, which added 95,000 jobs.
Retail spending, however, is showing signs of faltering. It’s declined in three out of the past four months. Services spending in December was flat after adjusting for inflation, its worst monthly showing in nearly a year.
Finally, interest rate hikes have thrown cold water on the once-scorching U.S. housing market. Prices fell in November 0.3% from the month prior and are down 2.5% from June’s peak.
Banks Brace for Delinquencies
Amid the uncertain economic climate, banks are bracing for more consumers to fall behind on their loans. Major credit card issuers, like Capital One and American Express, have increased loan loss reserves 33% and 25% vs. the previous quarter, respectively. More borrowers are falling behind on their car loans, with delinquency rates normalizing to pre-pandemic levels. Subprime auto borrowers who are 60+ DPD rose to 5.67% from a low of 2.58% in April 2021.
Fed Blocks Custodia’s Master Account Bid
The Kansas City Fed has declined crypto-focused Custodia’s application for a Fed master account. The decision came shortly after the Board of Governors declined Custodia’s application to become a state member bank of the Fed. The Fed’s decision comes after a lengthy process that led to Custodia filing a lawsuit seeking to force a decision. With the application adjudicated, the Fed argues the lawsuit is now moot, though Custodia insists it will continue to fight.
In other Kansas City Fed news, the regional Fed bank doesn’t have a clear successor once current president Esther George leaves office this week. Kelly Dubbert, Kansas City’s VP and COO will become interim president and CEO until a permanent replacement is selected.
CFPB Aims To Trim Credit Card Late Fees
The CFPB released a new proposed rule to reform credit card late fee practices last week. Current regulations were formulated by the Federal Reserve Board to implement the CARD Act prior to the CFPB’s creation. The rules give card issuers safe harbor to charge up to a set amount in late fees, with the cap automatically adjusted each year in line with inflation. Typical late credit card late fees run as much as $30 for a first late payment and $41 for subsequent late payments.
The proposed rule would bring the cap down to $8 per late fee and do away with the automatic adjustments. Per the CFPB’s statements, the rule change could reduce card issues’ late fee revenue by as much as $9Bn a year. The proposed rule is sure to drive pushback from bank and card issuers and comments from across the political spectrum.
Stripe Looks To Raise At $55-60Bn Valuation
First, Stripe floated a potential IPO. Now, reports indicate the payments giant is in talks to raise some $3Bn in funding at a substantially reduced valuation. Once valued at $95Bn, Stripe is said to be in discussions to raise funds at a valuation around $55-60Bn. While this is obviously a steep discount from its last private round, it reflects broader market conditions and reduced valuations for public market comps.
Part of the need for the fundraise stems from tax bills tied to employee equity compensation. Stripe is also looking to provide liquidity to longtime employees whose options are on the verge of expiring.
Sunstone Series A For Solar Loans
Sunstone, a “tech-enabled” clean energy financing platform announced an oversubscribed Series A fundraise. The company raised $20Mn from lead investor Greenbacker Capital Management, with participation from Cross River Digital Ventures, Earthshot Ventures, Grotech Ventures, and Forbright Bank. Sunstone offers solar financing for businesses through a national network of solar panel installers.
Moov Raises $45Mn for “Network-of-Network” Payments Platform
Payment infrastructure company Moov announced its $45Mn Series B. The funding round was led by Commerce Ventures with participation from Andreessen Horowitz, Bain Capital Ventures, Visa, and Sorenson Ventures. Moov aims to offer financial services companies a single point of access to multiple payment rails. It functions as an acquiring processor, issuer, and program manager, as well as having integrations with the Fed and The Clearing House.
Marqeta Makes an Acquisition
Issuer processor Marqeta is beefing up its capabilities with a $275Mn all-cash acquisition of Power Finance. Marqeta has historically focused primarily on debit, while two-year-old Power Finance built a credit card issuance platform. Bringing Power Finance’s capabilities into Marqeta allows Marqeta to offer a fuller-stack of functionality and likely obviates the need for certain outside partnerships, letting Marqeta retain a greater share of revenue.
Layoff Watch: Upstart, PayPal, BM Technologies
Layoff announcements continued in the fintech sector last week. PayPal announced plans to trim 2,000 workers, or about 7% of its workforce, in coming weeks. Banking-as-a-Service provider BM Technologies cut 25% of its staff as part of a “profit enhancement plan.” And lending platform Upstart is trimming about 350 employees, which is about 20% of its current headcount.
SoFi and Enova Report Earnings
Source: PeerIQ
SoFi and Enova reported earnings this week, with both companies announcing sequential origination declines (SoFi (15)%, Enova (3)%) due to credit tightening. Specifically, Enova management emphasized its focus on shorter maturity products and on decreasing its exposure to consumer installment loans in its portfolio.
Enova’s NCO’s as a % of average loans was 8.8% for the quarter, slightly higher than the 8.4% reported in the third quarter. While NCOs have crept up over the past year, they still remain well below pre-pandemic levels of 15.6% in 4Q19 and 16.1% in 4Q18.
SoFi’s sequential personal loan growth (+12%), was outweighed by declines in home loans ((51)%) as rates rose, and student loans ((11)%) as a result of the continued moratorium on student loan payments.
SoFi’s high yield checking and savings offering has continued to garner deposits by offering APY up to 3.75%. This offering has helped deposits grow 46% sequentially to $7.3Bn. The growth in deposits compares to the growth in Capital One and Ally deposits, who also offer high yields on their deposits, and contrasts with large banks’ decline in consumer deposits.
With the growth in deposits, SoFi has benefitted from a cheaper cost of funds to fund loans. In fact, management reported savings of 190 bps on cost of funds versus using other sources of debt, an increase from just 125 bps in 3Q22 and 100 bps in 2Q22.
In the News:
Inflation Outpaces Wages in Most US Cities, But LA Bucks Trend (Bloomberg, 1/31/2023) Seattle was the only one of the 15 metro areas studied where wage growth was still accelerating at the end of last year, while Phoenix and Houston saw the sharpest drop offs in wage growth.
Cooler Pay Gains Add to Debate on When Fed Might Pause Rate Hikes (Wall Street Journal, 1/31/2023) Wage and benefit growth ran at annualized rate of 4% in Q4, well below the 5.8% rate recorded early in 2022.
CFPB Lawsuit Seen as Warning Shot to Subprime Auto Lenders (American Banker, 1/29/2023) A federal lawsuit against subprime auto lender Credit Acceptance Corp. alleges that the company deceived subprime borrowers into taking out inflated loans they could not repay.
New York Regulator Investigating Crypto Exchange Gemini Over FDIC Claims: Report (CoinDesk, 1/30/2023) Gemini reportedly claimed that customer assets in its Earn product were safe thanks to being backed by the FDIC.
Custodia Bank Rejection: What’s Next? (Fintech Nexus, 2/1/2023) CEO Caitlin Long says the rejection is only the beginning and the bank will exercise its right to appeal the decision.
‘Buy Now, Pay Later’ Is the Victim of its Own Success (New York Times, 1/28/2023) Increased competition, regulatory scrutiny, and rising interest rates are challenges BNPL companies face.
Do US Super Apps Stand a Chance in Today’s Embedded Finance Landscape? (Tearsheet, 1/30/2023) Super apps are harder to build in the US ecosystem than in some other countries.
Elon Musk Pushes Forward with Twitter Payments Vision (Financial Times, 1/31/2023) Twitter has begun to apply for regulatory licenses across the U.S. and is designing software required to introduce payments.
Cash App Launches New Feature to Help Consumers With Savings (PYMNTS, 1/31/2023) The new feature allows customers to save with a separate balance.
Amex is Rolling Out a Small Business Hub with Tech from the Embattled Fintech Kabbage (Fast Company, 1/31/2023) Amex is launching American Express Business Blueprint, a new digital cashflow and management hub designed specifically for small businesses.
Lighter Fare:
A Bear On Mars?’ NASA Spots Trippy Phenomenon On Planet’s Surface (HuffPost, 1/30/2023) Moon bears? IYKYK.