Happy Sunday,

The FOMC held rates steady. U.S. retail sales and PPI rise. Americans plan to spend less. CFPB warns on using AI for credit decisions. ZayZoon raises $34.5Mn for EWA. JPMorgan Chase partners with payroll provider Gusto. Plaid and Cross River team up on FedNow. Jack Dorsey takes over at Square. Goldman nears GreenSky sale.

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Fed Holds Rates Steady (for now)

The big news last week was that, as expected, the Fed held interest rates steady at 5.25-5.5%. At the same time, however, the central bank signaled it expects to hold rates higher for longer, in order to reach its long-term target of 2% inflation. Updated projections on where FOMC members think future rates will be show that 12 of 19 officials favor another hike this year.

Despite the pause in rate hikes, other economic data has been mixed. U.S. retail sales and producer prices both rose in August, buoyed largely by rising fuel costs. Increased consumer and business spending on energy risks crowded out other discretionary spend. Projections suggest the restart of federal student loan payments could cost American families as much as $100Bn over the coming year, meaning less to spend elsewhere. And a new CNBC-Morning Consult survey shows that Americans plan to continue to curtail their spending, including through the all-important holiday period.

Image: Bloomberg

CFPB Warns on AI

The Consumer Protection Financial Bureau released a circular last week warning lenders of their obligations under ECOA and its implementing regulation, Reg B, to provide users with a “notice of adverse action” that explains a specific reason for denial. The Bureau’s statement warned against relying on a sample form and checklist that the Bureau provides, “if they do not reflect the actual reason for the denial of credit or a change of credit conditions.” The statement also highlighted that these requirements apply, even where AI-based decisioning algorithms and “alternative data,” are used. While many in industry have argued AI and alternative data can improve financial inclusion by better underwriting applicants who lack enough traditional credit data to be scorable, the CFPB and prudential regulators have expressed concerns over potential consumer harm from using such data and that some of these data points may not “intuitively relate to the likelihood that a consumer will repay a loan.”

ZayZoon Raises $34.5Mn

EWA provider ZayZoon announced it has raised a $34.5Mn Series B. The round was co-led by EDC and FrameWork, with participation from ATB Financial. ZayZoon’s core product charges users a fee of $5 to access their pay early. Workers can access from a minimum of $20 to a maximum of $200 per pay period. The company does offer a no-fee option, if users opt to have the proceeds paid out via store gift card and consent to sharing personal data for marketing purposes. Nearly 10-year-old ZayZoon boasts over 10,000 business customers and integrations with 160 payroll providers.

JPMorgan Chase Partners with Gusto

In a move many are viewing as a response to Square’s slow but steady move upmarket, JPMorgan Chase struck a partnership with payroll platform Gusto to offer the payroll startup’s services to Chase SMB customers. The partnership is a big win for Gusto and is notable as Chase has more of a track record of acquiring companies or building its own capabilities vs. partnering with third parties. But, payroll is incredibly complicated. Taxes and withholdings vary at the state, county, and even city level. Partnering with Gusto enables Chase to get an offering to market more quickly. How big of a deal could this be for Gusto? Chase currently has about 5Mn SMB customers, of whom 200,000 use the bank’s payment solutions.

Plaid and Cross River Team Up on FedNow

Cross River Bank has partnered with Plaid to expand access to the recently launched FedNow real-time payment network. Cross River also supports The Clearing House’s RTP offering, making it among the first financial institutions to provide interoperability by providing routing options on both networks. The partnership with Plaid will add another option to the company’s Plaid Transfer service, which provides Plaid clients with a turnkey service for instant payouts across multiple payment rails and to U.S. companies of all sizes.

Dorsey To Take the Reins at Block Unit Square

Jack Dorsey is making the most of his time now that he’s freed from running Twitter, it seems.

The CEO of Block, which includes SMB POS Square, consumer banking/payments app Cash App, crypto units Sprial and TBD, and, for some reason, music service TIDAL, will take over as CEO of the Square business unit. Current CEO Alyssa Henry will step down from the role effective October 2, according to regulatory filings. Henry’s departure isn’t entirely unexpected. The exec had a 9-year run at the company, and there had been speculation she would seek the top job at another publicly traded company.

But Dorsey’s stepping in to take over was not anticipated. Dorsey’s decision may have been influenced by the business unit’s lackluster performance in recent quarters, as well as growing threats from establishment competitors like JPMC, as well as tech companies like Apple. The embarrassing outage earlier this month, which left some merchants unable to process payments for a day or two, may have also played a role.

Goldman Closes In on GreenSky Sale

The dismantling of Goldman’s consumer ambitions continues. The firm viewed GreenSky, which offered unsecured personal loans through home improvement contractors and retailers, as a key part of its push into consumer lending when it bought it for about $1.7Bn just a year a half ago. Now, it’s close to a deal to sell it for just $500Mn. A consortium of firms, including Sixth Street, Pacific Investment Management, and KRR are said to be close to a deal to buy the company from Goldman.

GreenSky is the second acquisition done under CEO David Solomon’s tenure that is now being unwound. In 2019, the firm acquired United Capital advisors, in a push to grow its wealth management franchise. Last month, Goldman announced it’s selling its personal financial management unit, which includes the United Capital business.

TransUnion Releases its Monthly Consumer Credit Snapshot

TransUnion just released its monthly credit snapshot for August, with lots of great data on the consumer unsecured and bankcard spaces.

In August, 60+ DPDs increased across the board (MoM) for Unsecured Personal Loans (“UPLs”) +10bps, Auto +9bps, Bankcard +1bp and Mortgage +1bp. This compares to July, where Auto, Bankcard and Mortgage 60+ DPDs increased sequentially, but UPL 60+ DPDs declined by (5)bps.

Looking at bankcard, cracks may be emerging, as 90+ DPD vintage delinquency rates have risen, with Q4 2022 90+ DPDs slightly above Q4 2021 vintage delinquency levels and well above Q4 2017-2020 vintages. At the same time, average bankcard balances rose 1% MoM, to $6,039.

Source: TransUnion

Turning to originations, we got information on UPL origination volume for the May 2023 – June 2023 period (lag due to reporting time). June MoM UPL origination growth was mixed, after across the board MoM growth in May. Average UPL balances per consumer increased +0.5% on a MoM basis, to $11,799.

June fintech UPL originations declined across most risk tiers, (reversing the May trend) with super prime (6.0)%, prime (6.8)%, near prime (10.8)%, and subprime (15.5)%, while prime plus reported growth of +4.3%. All risk tiers remain significantly below June 2022 levels, with super prime (47.7%), prime plus (39.3)%, prime (55.4)%, near prime (63.0)%, and subprime (69.0)%.

Credit unions have fared better with prime and above UPL originations up on a MoM basis – super prime +1.1%, prime plus +1.8% and prime +2.7%. Credit unions cut back on near prime (6.2)%, and subprime (1.3)% originations in June. On a YoY basis, super prime +17.6% and prime plus +7.7% were above 2022 levels, while prime (1.9)%, near prime (3.8)%, and subprime (0.6)% slightly lagged.

Finance companies slowed from their trend of double-digit MoM UPL originations, reporting super prime (0.6)%, prime plus (3.4)%, prime (1.5)%, near prime (1.4)%, and subprime +1.0%. While super prime originations are up 30.6% from June 2022, all other risk tiers remain below year ago figures (prime plus (14.1)%, prime (4.4)%, near prime (7.4)%, and subprime (21.9)%).

Banks reported UPL origination growth in June (prime plus +0.6%, prime +1.1%, near prime +2.3%, subprime +5.0%) for all but the super prime risk tier (1.5)%. Bank originations are well above June 2022 levels, with super prime +73.2%, prime plus +27.5%, prime +14.4%, near prime +31.1%, and subprime +8.1% from a year prior.

Wrapping things up, finance companies maintained their lead in UPL balances, accounting for 29.3% in August. Fintechs accounted for 28.0%, banks accounted for 22.7% of total balances and credit unions accounted for 20.0%.

In the News:

Why a Soft Landing Could Prove Elusive (Wall Street Journal, 9/18/2023) The Fed faces four threats in trying to stick a “soft landing,” holding rates too high too long, if growth accelerates, energy prices rise, or a financial crisis erupts.

The Fed Isn’t Getting the Economy It Expected (Wall Street Journal, 9/18/2023) The Fed might be forecasting higher inflation and lower GDP growth that is likely.

No prison for Tolstedt in Wells Fargo scandal, as judge says she was singled out (American Banker, 9/15/2023) Wells Fargo retail banking chief avoids prison time in fake accounts scandal.

Citigroup debuts token service in latest foray into digital assets (American Banker, 9/18/2023) Citi launched a service that allows institutional customers’ deposits to be tokenized and sent anywhere in the world, instantly.

Robinhood Wants to Grow Up (Wall Street Journal, 9/16/2023) Robinhood now has 325,000 IRAs on its platform with assets totaling over $1Bn.

Rakuten backpedals on plan for credit union charter (American Banker, 9/18/2023) Rakuten has withdrawn its application to form a credit union in its latest setback.

Card issuers, payment processors should brace for a downturn (American Banker, 9/18/2023) BCG forecasts a slowdown in growth for the payments industry.

What the UAW strike means for auto lenders (American Banker, 9/18/2023) The strike could further constrain auto inventory and reduce demand for new vehicle loans.

PayPal Shares First PYUSD Report as Stablecoin Market Fades to $131 Billion (Decrypt, 9/19/2023) PayPal’s PYUSD stablecoin is off to a slow start.

IKEA and Afterpay Bring BNPL to Furniture Buying (PYMNTS, 9/19/2023) IKEA is teaming up with Block’s Afterpay to offer BNPL.

Lighter Fare:

Rare dinosaur skeleton, known as ‘Barry,’ goes on sale in Paris auction (CNN, 9/18/2023) If you’re in the market for a dinosaur, get your checkbook ready.