Greetings,
Markets brace for rate hikes, quantitative tightening. Binance.US raises over $200Mn. Bank earnings buffeted by interest rate hikes, inflation. Amex files metaverse patents. FICO fights to maintain relevance. Fast shuts down. Credit unions face deposit glut and anemic loan demand. Big banks debate positioning Zelle as a payment method.
Cross River Bank CEO Gilles Gade was on CNBC’s The Exchange last week, discussing the future of fintech, how the yield curve is impacting banking, and Cross River’s robust loan growth. You can watch the interview on CNBC.
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Pace of Tightening Set to Accelerate
The Fed’s Lael Brainard, who is awaiting confirmation as vice chairwoman, said that reducing inflation “is of paramount importance.” The statement is notable, as Brainard has been an advocate against prematurely pulling back stimulus.
Minutes from the Fed’s meeting last month indicate a faster pace of rate increases may be in the cards. Rates could rise in 0.50% increments beginning as early as the Fed’s next meeting. Plans are also in the works to reverse quantitative easing by reducing the size of the Fed’s balance sheet. Such “quantitative tightening” is anticipated to be equivalent to a 0.25% rate increase.
Binance.US Raises Over $200Mn as SEC Eyes Greater Oversight
Binance.US raised over $200Mn in its first external funding at a pre-money valuation of $4.5Bn. The company’s CEO, Brian Shroder, said that, despite sharing a common name, Binance.US is a separate entity and not an affiliate or subsidiary of well-known crypto exchange Binance. At the same time, Binance.US shares a common founder, Changpeng Zhao, and licenses its name and some technology from Binance. The separate entity structure can help firms better comply with US crypto regulation and segregate risk.
What’s Binance.US planning on doing with its fundraising haul? CEO Shroder had a one-word answer: growth, though he declined to be more specific. Binance.US is already a top-three US crypto exchange, though lags significantly behind market leader Coinbase when measured by volume.
Meanwhile, SEC Chair Gary Gensler is planning greater oversight of crypto markets with the goal of achieving better investor protection. The SEC is planning to register and regulate crypto platforms (like Binance.US). The agency is hoping to separate the custody of assets from exchange platforms in order to lower risks to investors.
The SEC will work with the CFTC to regulate platforms that trade both security- and commodity-like tokens. Stablecoins are up for additional scrutiny as well, with Gensler spelling out concerns around tax avoidance, money laundering, and compliance.
Bank Earnings Likely to Highlight Rising Rates, Costs
Is it already almost earnings season again?
As Q1 earnings begin rolling out later this month, we’ll get a first glimpse of how the rapidly evolving interest rate and inflation environment is impacting banks. While increasing rates should help lift interest income, those tailwinds may be outweighed by increasing costs and decreasing fee income, amidst regulators’ on-going war against consumer service fees, particularly overdraft and NSF fees.
Amex Joins Metaverse Race
While the exact commercial potential of the metaverse remains hazy, that isn’t stopping banks and payment firms from piling in. American Express is the latest to begin staking out territory in the metaverse – through its patent filings, at least.
Amex’s metaverse patent filings cover cryptocurrency services, virtual banking, exchange services, and multimedia backed NFTs. Potential use cases covered by the patents include supporting payment services in the metaverse or operating an NFT marketplace.
With burgeoning consumer interest in evolving internet technologies, including areas like NFTs and the metaverse, it makes sense for establishment banks to hedge their bets by beginning to explore the commercial opportunities. Logical entry points for payments companies like Amex include leveraging their existing capabilities to enable transactions in these evolving consumer spaces.
FICO Fights to Maintain Relevance
Traditional credit scores are a frequent target of criticism from fintech startups and regulators alike. Critiques often include that traditional models, like FICO, aren’t “transparent” or that they risk perpetuating historic discrimination.
Now, FICO is firing back. Will Lansing, the scoring company’s CEO, says FICO is ‘evolving’ its scoring products to incorporate the kinds of alternative data touted by fintechs. Alternative data used by fintech lenders like Upstart and Petal can include rent, utility, cell phone, and cable payment history.
Bank account data, like the size, frequency, and consistency of deposits and balance history, is also increasingly used in credit decisions. FICO offers a scoring model that incorporates bank account data, UltraFICO, but it is infrequently used, because consumers must choose to opt in to it.
Affirm Scoops Up Engineers as Fast Abruptly Shuts Down
You’ve probably heard by now that one-click checkout startup Fast called it quits last week. The approximately three-year-old company had raised a total of $124.5Mn in equity, including from payments giant Stripe. After it failed to raise new funding, the company shut down as it reportedly ‘ran out of money.’
Affirm has reportedly given job offers to the ‘vast majority’ of Fast’s engineering team. While Affirm’s share price has drifted downward in recent months, it boasts some $3Bn in cash on its balance sheet. Affirm is taking the opportunity to scoop up sought after engineering talent, but says it isn’t planning its own one-click checkout solution.
With High Savings and Little Borrowing, Credit Unions Under Pressure
Credit unions are facing a pandemic hangover. Deposits are still high, thanks to risk-averse members who socked away money during the pandemic. And loan growth has remained anemic. The combination has led to the worst yield-on-asset ratio in credit union history. The measure dipped to just 2.97% in Q4 last year, down from 3.27% in Q4 of 2020.
The result? The likely impact is a compression on credit unions’ net interest margin and a lowering of net income.
Banks Debate the Case for Zelle at the Checkout
With the growing popularity of Zelle, the banks that own it are debating whether to push for its expansion from peer-to-peer to a payment method at checkout. At the heart of the debate is the question, is it in banks’ self-interest to promote a competitor to card networks like Visa and Mastercard?
Pushing Zelle as a payment platform could cannibalize interchange revenue banks get from card payments. But it could also give banks a chance to set their own rules – and fees. Wells Fargo and Bank of America are reportedly in favor of the plan to expand Zelle to retail payments. JPMorgan Chase isn’t convinced the time is right for an expansion. And US Bank and Capital One have yet to make up their minds, according to reports.
Zelle is the latest threat to emerge to Visa and Mastercard’s long dominance in US payments. Other threats include the growing popularity of BNPL, account-to-account payments, wallets like Paypal, Cash App, and Venmo, and even cryptocurrencies and stablecoins.
In The News:
The World Is Piling on Debt as It Battles Inflation (Wall Street Journal, 4/4/2022) Global economies battle inflation with subsidies and tax breaks to try and shield households/businesses from soaring prices.
OCC’s Hsu Zeroes in on Large Regional Banks as Source of Systemic Risk (American Banker, 4/1/2022) Hsu says large regional banks could become the next too big to fail firms, and that the OCC is looking at ways of incorporating resolvability into its bank merger review process.
Apple Taps Payments and BNPL to Accelerate iPhone Growth (The Financial Brand, 4/4/2022) While BNPL is growing fast in ecommerce, ecommerce still only represents ~20% of total sales. Apple Pay could represent a user interface to bring BNPL to the physical POS.
Challenger Bank Current Plans to Pursue Decentralized Finance (American Banker, 4/1/2022) Current aims to combine traditional banking with defi, which could allow them to offer benefits such as interest rates even higher than the 4% they currently offer (on up to $6k in balances).
Future of Financial Services Examined in Latest YouGov Report, Covering BNPL, Crypto-Assets (Crowdfund Insider, 4/4/2022) Younger generations are using BNPL due to spending capacities and inflation, and have lower trust in traditional banking than older generations.
Amazon and Chase Credit Cards: Nirvana in Co-Brands (Payments Journal, 3/31/2022) The companies sign a multi-year extension of the co-branded Amazon Prime Rewards Visa Signatures credit card, after earlier worries the two would part ways.
Banks Vie for Share of Trillion-Dollar Equipment Finance Market (American Banker, 4/4/2022) Lenders like the space because it thrives in good times, but essential equipment cannot usually be put off so there aren’t normally big drops in activity.
Codebase Launches White-Label BNPL Product (Finextra, 4/4/2022) The company’s product can be fully customized to allow firms to launch a BNPL offering within only a few months.
Visa Installments to Collaborate with Air Canada (The Paypers, 4/5/2022) Air Canada customers will be offered the flexibility to pay in installments at checkout.
How Payment Companies Hope to Address the Great Resignation (American Banker, 4/5/2022) Companies turn to wage flexibility to draw workers, offering incentives such as near-real time payments and earned wage access.
Block Notifies 8.2M Customers After Breach of Cash App Investing (CoinDesk, 4/6/2022) A former employee improperly accessed reports related to U.S. accounts.
Lighter Fare:
Rare Glimpse of Giant Planet Still ‘in the Womb’ Yet Nine Times the Mass of Jupiter (The Guardian, 4/4/2022) This star had a fleeting moment of fame when its image appeared in a scene in the 2021 film Don’t Look Up.