Happy New Year! I think we all deserve ‘congrats’ on surviving 2021. But, turning to 2022… Omicron is surging, trimming Q1 growth forecasts. Biden is looking to fill three Fed seats. Regulatory rumblings haven’t derailed banking M&A (yet). BNPL business models are evolving. Community banks launch CHUCK. 2022 bodes well for bank stocks. Real-time payments require new tools to fight fraud.
Also, if you’re a “noob” to crypto but want to get your bearings, give a listen to Cross River Bank’s Head of Digital Assets (and PeerIQ founder) Ram Ahluwalia on the FinTech Silicon Valley podcast for a 20 minute flyover on crypto – listen here. Topics include NFTs, DeFi, the Metaverse. Cross River provides Crypto fiat ramps to leading players including Coinbase. Reach out to learn more!
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Unemployment Steady, Omicron May Dent ‘22 Outlook
The word of the year for 2021 might be “uncertainty.” Or perhaps déjà vu. With COVID cases surging again in the US due to the Omicron variant, Americans are trimming economic activity outside the home, even in areas of the county that haven’t stepped up restrictions. Fear of the virus or disruptions from sick or quarantining workers have seen flights, sporting events, and Broadway shows canceled.
Biden Reportedly Considering Raskin as Top Fed Bank Regulator
President Biden is reportedly considering a slate of candidates for the three open Fed seats. Those said to be under consideration include Sarah Bloom Raskin, who has previously served as a Fed governor and Treasury Department official, for the role of vice chair of supervision. The move is seen as a nod to more progressive Democrats, some of whom chafed at Biden’s re-appointment of Fed Chair Jerome Powell to a second term.
End of Year M&A Approvals Show Continued Appetite for Dealmaking
2021 has seen an increase in talk about the risks to consumers of consolidation in the banking sector. Earlier in the year, President Biden issued a broad executive order on competition in the economy, which included reference to increased scrutiny of bank mergers. More recently, a power struggle broke out on the FDIC board between Trump-appointed Chair McWilliams and Democratic appointees around potential updates to rules implementing the Bank Merger Act.
But a flurry of end-of-year approvals from the Fed suggests fears of a rapid slowdown of M&A activity may have been overblown. For further evidence of continued appetite for M&A, look no further than Bank of Montreal’s $16Bn purchase of Bank of the West from BNP Paribas, announced in mid-December. Despite additional “uncertainty,” M&A seems unimpeded – for now.
BNPL Was Just the Beginning
Much ink was spilled over buy now, pay later in 2021. While the category includes a number of product formulations and user experiences, use of the “split pay” type of BNPL dramatically accelerated last year. COVID certainly contributed to the rise of BNPL, with a shift in consumption from services to goods and a dramatic jump in online vs. bricks and mortar shopping.
The explosive growth in the category has caught the attention of legislators and regulators, with a recent Congressional hearing on the topic and the CFPB opening an inquiry into the sector. The attention has scared some investors, pushing shares of BNPL providers lower on fears the attention may result in regulations that drive decreased revenue for the companies.
But the BNPL space is quickly evolving. Companies that began by offering BNPL as a standalone feature have moved rapidly to expand the scope of services they offer – to both end users and merchants.
For instance, Affirm is beginning to look more like a neobank, with its savings account offering and soon-to-launch “decoupled” debit card that will let consumers split transactions at almost any merchant. Klarna has made a number of acquisitions and even offers bank accounts in Germany. PayPal has been very vocal about pursuing a “superapp” strategy. In addition to rolling out BNPL in late 2020, PayPal has rapidly added savings, stocks, and even crypto to its app.
By the time regulation impacts business practices for BNPL offerings, most BNPL companies are likely to have diversified their products and business models enough to withstand any hits to revenue or increases in costs.
Community Bank Consortium Launches “CHUCK” to Compete with Big Banks’ Zelle
Community Banks have teamed up to launch a new payment network dubbed CHUCK. Powered by Payrailz, CHUCK is intended to be a competitor to Zelle, the peer-to-peer payment network operated by Early Warning, which is owned by a consortium of large banks. The offering is designed to be integrated into community banks’ mobile apps, alleviating the need to shuffle money between multiple apps or log in to their account just to check their balance.
Still, community banks may face an uphill battle to get their customers to actually use the service. P2P services Venmo and Cash App have been in market for years – long enough to build up substantial, loyal user bases. And while Venmo and Cash App are “closed loop,” meaning those sending and receiving money must both use the app, on the flip side, they can be used with pretty much any bank account. Their closed loop nature generates network effects that have driven user strong adoption while maintaining low CACs.
And while Zelle has broad availability, as it is embedded in large banks’ mobile apps, its lower brand recognition and clunky UX has slowed consumer uptake, though it has proven more popular for some SMB and B2B use cases.
CHUCK’s success will depend on how quickly a critical mass of community banks roll out the service and the propensity of their customers – who skew older and less tech-savvy – to adopt the new functionality.
Rising Rates and Demand for Loans Bodes Well for Bank Stocks in 2022
Despite a tumultuous year, bank stocks outperformed the broader market in 2021. And, despite continuing macroeconomic uncertainty, some analysts are saying the next couple of years could be a “golden era” for bank stocks, as interest rates look set to rise and loan books are finally beginning to grow again. Excess liquidity should allow banks to resist raising rates on deposits, lifting their NIM.
Headwinds, of course, remain. Concerns persist about inflation. Economic growth projections for Q1 2022 have already been downgraded. And degrading credit quality remains a risk. Still, the picture for banks at the moment looks good, and their share prices reflect that.
Image: American Banker
As Real-Time Payments Increase, Firms Pool Data to Fight Fraud
Real-time payments are finally accelerating in the US, though they still amount to just 1% of non-cash transactions. But with availability of The Clearing House’s RTP network growing and FedNow expected to come online in 2023, the share of payments that settle instantly is set to take off.
The downside? Less time to detect and mitigate fraud. The move from two day (or longer) settlement to instant requires a paradigm shift in how stakeholders in the payments chain work together to fight fraud.
AI models are already broadly used in fraud detection. But the efficacy of these models is highly dependent on the data that is fed into them. That’s why payment companies are working to bring data from issuers, acquiring banks, and merchants together in a way that benefits all parties.
However, such data sharing, even if well intentioned, could pose privacy risks to consumers – a topic that already has caught the interest of regulators recently.
In The News:
December Report: 40% of Consumers Pessimistic About Economy (PYMNTS, 12/28/2021) Optimism about the economy dropped from 44% in May to 34% in October.
Bitcoin-Owning Senator to Propose Crypto Overhaul Bill Next Year (American Banker, 12/23/2021) Sen. Lummis will introduce a bill that would provide regulators with clear guidance on how crypto is taxed, categorized, and would establish certain consumer protections.
Will Acting OCC Chief Get the Job for the Long Term? (American Banker, 12/21/2021) Michael Hsu could be in line to win the job and bring some longer term stability to the position, which has seen six comptroller or acting comptrollers in the past five years.
Oportun Closes $150m Credit Facility Secured by Credit Card Receivables (IBS Intelligence, 12/21/2021) Oportun expects credit cards to account for $50Mn in receivables by year-end.
Fintech Firm Avant Announces Launch of Digital Banking Platform (Crowdfund Insider, 12/20/2021) Users will have access to spending accounts, debit cards, ACH transfers, and payday funds up to two days early.
Capital One Settles Class-Action Cyber Lawsuit for $190 Million (American Banker, 12/23/2021) The lawsuit settled was in regard to a hacker breaking into its cloud computing systems and stealing personal information from 100Mn U.S. customers.
The Big Ideas that Fintech will Tackle in 2022 (a16z, 12/20/2021) a16z sees crypto, healthcare and sustainability as major fintech themes in the year ahead.
CFPB Shutters Lending by VC-Backed Fintech for Violating Agency Order (CFPB, 12/21/2021) LendUp Loans agrees not to make any new loans or collect on outstanding loans.
Why Chime Should Keep Bankers Up at Night in 2022 (The Financial Brand, 12/27/2021) Chime has broken into the top 10 U.S. banks, if measured by number of customers.
How a Store-Branded Card Issuer is Surviving the Retail Apocalypse (American Banker, 12/28/2021) Alliance Data has survived by making big moves, such as buying fintech lender Bread, and partnering with Sezzle.
Opportunity for Banks in Offering Low-Cost Deposit Accounts (American Banker, 12/28/2021) Bank On, a checking account designed by the nonprofit Cities for Financial Empowerment Fund, has been gaining momentum, with 2.2Mn customers opening accounts in 2020.
2021 was a Huge Year for Space Exploration. 2022 Could be Even Bigger. (Washington Post, 12/27/2021) NASA is gearing up to launch its SLS rocket, marking the first steps towards a return to the moon, and SpaceX plans the first orbital launch of Starship.