Natural gas jumps on Russia cut offs. Fight for Fed accounts moving slowly. CFPB invokes “dormant” authority. Is it time for regional Fed bank reforms? Teen banking app Copper raises $29Mn. PayPal and Venmo hike instant funding fees. SALT makes crypto lending available at 5,000 car dealers. Cross River partners with Sardine. Revolut eyes mortgages, crypto wallets. Bolt sued by biggest customer.
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U.S. Economy Contracted by 1.4% in Q1, Natural Gas Prices Rise
The U.S. economy unexpectedly contracted by an annualized 1.4% in the first quarter. The reversal from a nearly 7% growth rate in Q4 2021 came amidst supply chain disruptions, a surge in imports, and a drop in exports. Strong consumer and business spending suggest any contraction should be brief.
Meanwhile, natural gas prices spiked after Russia cut off supplies to Poland and Bulgaria when the countries refused to make payments in rubles instead of dollars or euros. Benchmark prices traded up 4.1% in Europe on the news. Prices climbed in the U.S. as well, on the expectation that supplies will remain tight as more natural gas is shipped abroad.
Fight For Fed Accounts Moving at Snail’s Pace
Wyoming has been on the forefront of granting special-purpose charters to crypto companies. Part of the appeal of the novel state charter was the promise of master accounts at the Fed and access to Fed payment systems. Wyoming SPDI charter holders like Custodia Bank and Kraken Bank are still waiting – and they’re getting impatient.
For their part, the establishment banking sector, represented by numerous trade groups, continues to push back. The Fed has been working to revise its guidelines for how it will review applications for master accounts to non-traditional banking entities. The Fed’s most recent proposal outlined three categories: federally-insured institutions with prudential oversight; non-insured institutions with prudential oversight; and institutions that are neither insured nor subject to prudential oversight.
Banking groups are pushing back on the Fed’s latest efforts. They argue the guidelines are not specific about what types of institutions may qualify for accounts and details about how the review process will be executed.
CFPB Invokes “Dormant” Authority to Examine Non-banks
Last week the CFPB announced it would use a “dormant” legal authority to step up its supervision of non-bank entities, including fast-growing fintechs. CFPB Director Chopra positioned the change as “leveling the playing field” by holding non-bank entities to the same standards that banks are held to.
The “dormant” authority the CFPB cites is its right to supervise non-banks “whose activities the CFPB has reasonable cause to determine pose risks to consumers.” Examples of such activities the CFPB gives include engaging in unfair, deceptive, or abusive acts and practices or other violations of federal consumer financial law.
Time for Regional Fed Bank Reforms?
Legislators on both sides of the aisle are pushing for reforms to the Fed’s system of 12 regional banks. Many of the original functions of the regional Fed banks have either been consolidated at the national level or replaced with digital processes. The banks themselves have an interesting structure. They’re owned by their member banks but charged with operationalizing monetary policy set by the Federal Reserve Board, making them not entirely private nor entirely public.
As far as proposed reforms, they run the gamut. Soon-to-retire Sen. Pat Toomey (R-PA) is seeking to rein in “mission creep” in the Fed’s 12 regional banks. Toomey is particularly concerned with what he sees as the politicization of the banks. Toomey argues “growing politicization” puts the banks’ independence and effectiveness at risk.
Meanwhile, Democratic lawmakers have called for a host of reforms of their own. Sen. Jack Reed (D-RI) has long advocated for making the President of the New York Fed a presidentially-appointed and Senate-confirmed position. Sen. Elizabeth Warren (D-MA) wants greater transparency around how Fed presidents manage their personal investments, and Sherrod Brown (D-OH) wants to ban Fed presidents from investing in individual stocks.
Teen Banking App Copper Raises $29Mn
In less than a year, teen banking app Copper has grown to 800,000 users. Now, the company is announcing it has raised a “preemptive” funding round just seven months after its seed funding. Its $29Mn Series A was led by Fiat Ventures with participation from Insight Partners, Invesco Private Capital, Panoramic Ventures, and existing investors.
Parents can use the app to send money to their children and monitor their spending. The app also supports direct deposit, peer-to-peer transfers, and popular digital wallets like Apple Pay, Google Pay, and Samsung Pay.
PayPal & Venmo Hike Instant Funding Fees
PayPal and its subsidiary Venmo are hiking prices. The popular payment apps are increasing the amount they charge for instant funding. The cost for personal PayPal accounts and both personal and business Venmo accounts will rise from 1.5% to 1.75%, with a minimum of $0.25 and a new, higher maximum of $25 per instant transfer. Pricing for PayPal business accounts will stay the same, at 1.5%, but the minimum charge will rise to $0.50 and the maximum fee cap will be removed.
PayPal’s move to increase its take rate for instant transfers mirrors a similar pricing increase for Block’s Cash App. But, longer term, we wonder about the sustainability of these fees as a revenue source. With multiple new natively instant payment networks on the horizon (FedNow, RTP) and growing adoption of low-cost crypto payment mechanisms (stablecoins, Lightning Network), over the long term, payment pricing should logically be a race to the bottom.
SALT Introduces Crypto Lending-as-a-Service
Crypto-world continues to crossover with traditional finance in interesting ways. SALT, which offers “crypto lending-as-a-service,” has partnered with Coin Digital to bring crypto-backed lending to some 5,000 US auto dealerships. The partnership enables end consumers to use their crypto as collateral to secure a car loan at the point of sale. SALT will also enable buyers to use crypto as a down payment or to pay for a vehicle purchase in full.
With major cryptos primarily thought of as an asset class, holders of those currencies are increasingly looking for ways to leverage their holdings, without incurring capital gains. That market opportunity is driving an opportunity for traditional lenders willing to lend against crypto assets. As adoption of crypto broadly increases, so should demand for these types of lending products.
Cross River and Sardine Partner on Risk Infrastructure
Cross River Bank announced last week that it has partnered with Sardine, a fraud and compliance platform, to provide critical infrastructure for companies building fintech and crypto products. Example uses cases of Sardine’s fraud and compliance tech include enabling “instant ACH” by using AI to assess the riskiness of a transaction in real time.
Regarding the partnership announcement, Cross River Bank’s head of digital assets Luca Cosentino said, “As a crypto-first financial institution, supporting the crypto industry is not only core to Cross River’s mission, but it’s also our responsibility. Sardine is working on one of the most important problems in the payments and crypto world, and we are proud to serve them with our API-driven payments infrastructure, the base layer of the fastest-growing fintech and crypto companies.”
Revolut Eyes Expansion into Mortgages, Crypto Wallets
Neobank Revolut is looking to expand into mortgages and crypto wallets, its founder and CEO Nik Storonksy says. The company has aggressively added new functionality as it pursues a “superapp” strategy. Near-term plans include adding expanded remittance functionality and a buy now, pay later capability. Longer-term goals include more crypto and defi functionality, including crypto wallets, staking, and lending. Storonsky also pointed to mortgages as a key future offering, acknowledging they “are quite an important part of consumer financial life.”
One-Click Checkout Firm Bolt Sued by Biggest Customer
More drama in the one-click checkout space. Bolt, whose approach to the sector appeared to be bolstered by competitor Fast’s recent implosion, is now being sued – by its biggest customer.
Authentic Brands Group, the parent of brands like Forever21 and Lucky, argues Bolt’s technology failed to deliver on what it promised. Integration and technical challenges hurt its conversion rates, costing it $150Mn in lost revenue, the company said. ABG also suggests that Bolt “affirmatively misled” investors in how it used ABG’s brands in its investor materials, as only two were using Bolt’s one-click checkout solution.
The case may pose a challenge for Bolt’s sales funnel – and for its $11Bn valuation.
Consumers Continue to Spend Despite Uncertainty in the Markets
Although GDP fell 1.4% (at an annual rate) during the first quarter, consumer spending rose 2.7% (at an annual rate), to the benefit of payments companies and consumer lenders. Amidst a volatile week for the markets at large we saw companies surge on earnings beats (LendingClub +18.7%, PayPal +11.5%, Discover +8.4%, Visa +6.4%, Fiserv +5.0%, Mastercard +4.8%),and some slide on either earnings disappointments or due to broader market slumps (Finwise (6.3)%, Capital One (6.1)%, Robinhood (2.8)%, OneMain Financial (1.4)%, Navient (1.3)%).
Strong consumer spending was reflected in payments companies’ earnings, with Visa reporting a 17% increase in payments volume YoY (on a constant basis), PayPal reporting a 15% increase YoY (on a FX-neutral basis), and Mastercard reporting a 12% increase YoY. Notably, PayPal’s Venmo processed ~18% of its total payment volumes, growing 12% YoY.
In their push to become a financial superapp, PayPal has found early success with their digital wallet and BNPL product. PayPal reported $3.6Bn in BNPL volume for the quarter, a 256% increase over the prior year.
Over 70% of PayPal BNPL users engaged through their digital wallet. CEO Dan Schulman reported that, “Our digital wallet ARPA is 2x that of a customer who only uses checkout, and the churn rate for digital wallet users is 25% less than the rest of our base.” PayPal management envisions a future where users may be able to pay with PayPal cards, enter the PayPal app and split the purchases into a PayPal installment product.
In building a fully integrated superapp ecosystem, it will be important that users are loyal and use multiple products, something that PayPal appears to have made some progress towards.
Mastercard and Visa are not going to be left behind in the installment lending space. Mastercard announced several new merchant partners that would support Mastercard Installments including Bass Pro Shops and Cabela’s, H&R Block, Saks Fifth Avenue, and Walgreens. Visa reiterated its partnership with Klarna, ahead of the release of the Klarna Card, which is currently waitlisting customers.
Despite only ending the trading day down (2.8)%, Robinhood reported some troubling earnings. Just a few days after announcing a 9% reduction in force, the company reported steep declines in monthly active users (15.9Mn, from 17.3Mn in Q4) and average revenue per user ($53 vs $64 in Q4). More concerning is that monthly active users have declined every quarter since their 2Q21 peak. CEO Vlad Tenev explained the trend with, “When we look a level deeper, our larger customers are still remaining active, but we are seeing more pronounced declines from those that have lower balances.” Basically, smaller investors have gotten spooked by recent macro headwinds and are acting more cautious than the past.
Robinhood hopes to buck the downward trend with the recent introduction of the Robinhood Cash Card, their international expansion via acquisition of Ziglu, and their planned integration with the Lightning Network.
LendingClub had a big day, up nearly 20% as the company beat estimates and lifted full-year revenue guidance. The fintech continued to grow its deposit base, up 27% from the end of the year, and crossed 4Mn members during the quarter.
LendingClub reported strong origination growth, up 117% YoY and 5% QoQ to $3.2Bn. Management wants to build on the growth in personal loans, but also focus on auto refi and finance loans. While the auto business should have a higher growth rate going forwards, the segment’s impact on bottom line earnings will likely remain small. CEO Scott Sanborn is not overly concerned with the effect rising inflation will have on LendingClub’s business, stating, “History would indicate that inflation typically does not correlate with the performance of unsecured loans and we expect our customers who have an average income of more than $100,000 to be particularly resilient.”
In the News:
How CFPB Is Reshaping Banks’ Growth Strategy (The Financial Brand, 4/25/2022) Banks will have to take a look to see if their marketing excludes or targets certain groups.
Senate Confirms Brainard as Federal Reserve’s Vice Chairwoman (Wall Street Journal, 4/26/2022) Lael Brainard wins Senate confirmation in a 52-43 vote.
The $7 Trillion Embedded Finance And BaaS Gold Rush (Forbes, 4/25/2022) It seems as if everyone is jumping on the embedded finance bandwagon.
Apple Drops Discover, Adds Visa, as Virtual Debit Card Partner (American Banker, 4/22/2022) The move may foreshadow Apple’s move to expand contactless payments, as Visa has a larger overall merchant footprint.
US Bank Forms Real-Time Payment Collaboration with Apex Fintech Solutions (Finextra, 4/25/2022) The move will enable individual investors to instantly fund their brokerage accounts and receive instant disbursements to their bank accounts.
Fidelity to Allow Retirement Savings Allocation to Bitcoin in 401(k) Accounts (Reuters, 4/26/2022) Saylor-led MicroStrategy will be the first employer to use the new product.
Buy Now Pay Later and the Healthcare Opportunity (Lendit Fintech, 4/25/2022) Many Americans who apply for credit to finance healthcare expenses are denied.
Despite Stellar Credit Quality, Small Lenders Expect Economic Headwinds (American Banker, 4/26/2022) Lenders expect inflation and a dramatic increase in interest rates to cause NCOs and delinquencies to rise.
Robinhood Cuts Nine Percent of Workers (Lendit Fintech, 4/26/2022) The move comes right before the company reports earnings, and as tech valuations have sunk over the past few months.
China Announces Plans for a New Asteroid-Deflecting Mission (The Verge, 4/25/2022) Like Armageddon, but real life.