Markets drop on unpleasant inflation report. Goldman’s subprime problem. Credit card rates hit 26-year high. JPMorgan acquires cloud-based payments switch Renovite. Fitch acquires majority stake in dv01. Walmart readies checking account.
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Inflation Remains Elevated, But (Small) Silver Lining
Markets were not thrilled with the latest CPI print. Inflation rose 8.3% in August vs. the year prior. Core CPI, excluding food and energy, was up 6.3% year over year, which exceeded the 5.9% jumps in June and July. Continued inflation pressure is driving speculation of a possible 1% point rate hike at the Fed’s next meeting.
Image: Wall Street Journal
At least there’s a slight bit of good news. Fed surveys show consumers’ expectations of future inflation are moderating. The report showed consumers expect inflation to be 5.7% a year from now and 2.8% three years out, which is a substantial improvement vs. previous surveys.
In a sign of continued labor market strength, banks are having a hard time hanging on to front line employees. Despite average pay hikes of 5%, turnover has jumped from 16.2% last year to 23.4% this year.
Growing pains? According to JPMorgan analysts, the loss rate on Goldman Sachs’ card portfolio sits at 2.93%. This is at the same time that other major card issuers are continuing to see historically low charge offs. The lion’s share of Goldman’s card portfolio comes from its co-brand card with Apple, though Goldman also recently took over issuing for the GM co-brand credit card from Capital One. Over a quarter of the company’s credit card loan book is to borrowers with FICO scores below 660, according to its most recent 10-Q.
For its part, Goldman pointed to the newness of the portfolio. As the portfolio seasons and Goldman refines its underwriting, it expects loss rates to come down. Still, critics argue Goldman grew its loan book by leaning into riskier segments late in the credit cycle. High inflation and rising interest rates may spell trouble for riskier borrowers in Goldman’s portfolio.
In other Goldman news, the bank announced a partnership with Modern Treasury. Goldman’s “TxB” (transaction banking) will power Modern Treasury’s embedded payment offerings. The partnership will enable Modern Treasury customers to open virtual accounts, make domestic and cross-border payments, view real-time payment statuses, manage incoming payment receipts, and more.
Finally, despite record numbers last year, Goldman is gearing up to cut hundreds of jobs. After temporarily suspending annual performance reviews during the pandemic, the bank brought them back amid a slowdown in dealmaking. Now, with economic conditions tightening, the bank is looking to trim its headcount.
Goldman isn’t the only major bank mulling layoffs. JPMorgan is also “reassessing” staffing in a number of business units that have seen slowdowns, including in investment banking and mortgages.
Credit Card Rates Hit 26-Year High
As the fed funds rate goes, so too go credit card rates. The average interest rate on cards hit a 26-year high of 18.03%, according to data from Bankrate.com. The difference between the rate charges to consumers and the Fed’s prime rate now stands at 12.53%.
Still, most consumers are staying current on their debts and charge offs remain at historic lows. This helps explain the elevated profitability of major card issuers, which posted an annualized 6.93% ROA last year.
The CFPB has taken some actions aimed at the credit card industry, including by looking to boost competition and initiating a review of rules implementing the CARD Act. The potential impacts of these initiatives remains to be seen.
JPMC, Looking to Defend Its Turf, Acquires Renovite
If you can’t beat ‘em, buy em. JPMorgan Chase has long been a behemoth in the payments processing space. The bank facilitates some $9 trillion a day in payments across its business units.
But JPMorgan has seen growth lag recently, particularly in the all-important ecommerce category. Competitors like Stripe and Block have emerged as legitimate competitors for JPMorgan’s merchant acquiring business.
Enter Renovite. The startup offers a cloud-based switch for routing payments to various providers. The platform enables faster rollout of new payment methods. JPMorgan began testing the vendor last fall, but wound up deciding the tech was too important not to own outright. Approximately 125 software engineers working for Renovite will join JPMorgan through the acquisition. Financial terms of the deal were not disclosed.
Fitch Acquires Stake in dv01
Fitch Solutions announced it will acquire a majority stake in structured finance data provider dv01. dv01 offers loan-level data and integrated analytics for use across the investment workflow, including due diligence, securitization, and performance analysis.
When the deal closes, dv01 will operate as a subsidiary of Fitch. Financial terms of the transaction were not disclosed.
Walmart Prepares to Launch Checking
Walmart’s fintech project is nearly ready for primetime. The initiative, an independent company that is majority-owned by Walmart and counts Ribbit Capital as an investor, has been busy behind the scenes. Led by Marcus by Goldman alum Omer Ismail, the newly formed company made headlines with a couple of significant early acquisitions: neobank ONE and earned wage access platform Even.
It seems Ismail’s team has been working diligently to stitch these pieces together. The offering, using the “ONE” name and branding, is slated to launch to Walmart employees and a small percentage of its online customers later this month.
Walmart employees who sign up will get faster access to their wages at no additional cost. Customers will get 2% cash back on their purchases at pharmacies, gas stations, and, of course, Walmart. Future products could include loans and investing, with the goal being to become users’ “one stop shop” for financial services.
This isn’t Walmart’s first foray into financial services. At one point, the retailer applied for an ILC charter, in hopes of bringing down its costs to process payments. It also has longstanding partnerships with Green Dot, for prepaid cards, and MoneyGram and Ria, for remittances.
ONE is launching into an extremely competitive environment for consumer fintech, but it does boast something no competitor has: 5,335 brick and mortar stores across the U.S.
In the News:
Who Are America’s Missing Workers? (New York Times, 9/12/2022) The labor supply has fallen short due to Covid deaths, a slowdown in legal immigration, and older workers’ decision to remain retired.
Treasury to Warn of Crypto Risks (Wall Street Journal, 9/9/2022) The Treasury is completing and will send the White House reports on: the payment system, consumer protections, illicit finance, and financial stability.
SEC Creates New Office of Crypto Assets to Address Unique and Evolving Issues Related to Crypto (Crowdfund Insider, 9/9/2022) The creates 2 new offices, the Office of Crypto Assets and the Office of Industrial Applications of Services, both of which will be added to the Div. of CorpFin’s Disclosure Review Program.
OCC Names Yue Chen Climate Risk Officer (American Banker, 9/12/2022) The move puts greater emphasis within the OCC on managing climate risk.
How Starling Bank, Upgrade and Dave Cracked the Profitability Code (American Banker, 9/12/2022) All three have had to go beyond collecting interchange fees to achieve profitability.
Merchant Code for Firearms Sales Gets a Green Light (American Banker, 9/9/2022) The International Standards Organization approved a new code identifying credit card sales of guns and ammo.
Bolt Cans $1.5bn Wyre Acquisition (Finextra, 9/12/2022) Bolt had announced the acquisition in April, planning to integrate Wyre’s APIs.
Varo’s CEO Addresses Missteps & Reveals the Neobank’s Rebuilding Plan (The Financial Brand, 9/12/2022) The first and only consumer fintech to obtain a de novo national bank charter has downsized staff and doubled down on product development.
Fintech Ramp Introduces Network for SMB Lending (Crowdfund Insider, 9/12/2022) Ramp launches a lending partner network “to help customers find better long-term financing options”.
Mercury Launches Corporate Charge Card, Entering Crowded Fintech Field That Includes Brex And Ramp (Forbes, 9/12/2022) Mercury’s plan has been to offer smaller startups a bank account and then roll out more advanced products as their clients’ businesses grew.
Checkout.com Will Eliminate About 5% of Employees in Latest Cuts (Bloomberg, 9/13/2022) The move comes as the latest in a series of job cuts for tech companies.
How Sharks Could Hold the Key to Our Immunity (Daily Mail, 9/12/2022) Sharks’ immune systems are extremely effective at warding off disease and this discovery could lead to new medicines.