Slow job gains as inflation persists. Could the CFPB inquiry be good for BNPL? SMB-focused fintechs raise capital. Checkout.com worth $40Bn. PayPal considers a stablecoin. Banks loosen underwriting. TransUnion brings credit data to the blockchain.
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Slow Job Gains, Inflation Persists
Last Friday’s job report disappointed. The economy added just 199,000 jobs in December, down from November’s 249,000 gain. There were some silver linings in the report. Average weekly earnings were up 5.8% vs the year prior. Unemployment stands at 3.9%, driven in part by a lower workforce participation rate. Americans’ finances are generally in better shape than they were before the pandemic.
Though the road to recovery is still bumpy. Inflation hit a 40-year high, rising 7% in December vs. the prior year.
Could the CFPB Inquiry Be Good for BNPL?
The CFPB is taking a closer look at the BNPL. Late last year, the agency opened an inquiry into the sector. It sent demands for information to U.S. leaders in the space, including Affirm, Klarna, and PayPal.
Increased regulatory attention usually isn’t a good thing. But, in this case, it’s possible the CFPB inquiry highlights positive characteristics that attract users to favor BNPL over credit cards. Features like minimal or no fees, a close-ended term, and a streamlined UX.
The BNPL space is continuing to evolve, including companies focused on specific verticals. The travel vertical has seen a surge of interest in BNPL. Last week, Fly Now Pay Later, a travel-focused startup, announced an additional $75Mn in debt funding, bringing its total debt capacity to $150Mn.
There may be lessons here for card issuers and payment networks. Early attempts to respond to BNPL required customers to take several steps after the fact to convert a credit card transaction into a BNPL-style payment plan. Now, Visa and Mastercard are testing capabilities that enable card issuers to make instant credit offers at the point of sale.
Evolving regulation will undoubtedly impact product design and distribution for novel credit products like BNPL. But the product category isn’t going away. Traditional lenders need to adapt and respond to evolving consumers preferences. If that adaptation is difficult internally, banks have other options, including through partnerships and corporate dev strategies.
SMB-Focused Fintechs in the Spotlight, Raising Rounds
Last week saw some major fundraising hauls for startup- and SMB-focused fintechs.
Charge card startup Brex raised a $300Mn mega-round, valuing the company at $12.3Bn. The company has steadily added functionality to its core card offering. In addition to its primary card offering, it also boasts business cash accounts, spend management, and bill pay solutions.
Novo, a neobank focused on SMBs, had its own news last week. The company raised a more modest $90Mn, valuing the company at $700Mn. Novo has tripled its number of users to 150,000 since last June. The company plans to use the fresh funding to enhance its infrastructure, build new products (including lending), and acquire more customers.
The SMB space seems to be having a moment in the sun. Interest in consumer fintech seems to have cooled a bit, perhaps in part driven by the poor performance of some fintechs hitting the public markets last year. VC interest has rotated to “infrastructure” and B2B- and SMB-focused fintech startups, to Novo and Brex’s benefit.
Checkout.com Scores a Cool Billion
London-based payment processor Checkout.com has raised a $1Bn round of financing, which values the company at $40Bn. New investors in the round include Franklin Templeton and the Qatar Investment Authority.
Checkout.com operates in the hyper-competitive world of payments. Its startup rivals include perennial tech darling Stripe and European-based Adyen, not to mention numerous incumbent players.
If this deal illustrates anything, it’s the sheer size of the opportunity in payments. While there are network effects, the sector is large enough to support three $40Bn+ startups (Stripe, Adyen, and Checkout.com).
PayPal Mulls Stablecoin
After a software developer found traces of code in PayPal’s app referencing “PayPal Coin,” the company has confirmed it is exploring the launch of its own stablecoin as part of its broader crypto strategy. PayPal’s SVP of blockchain and crypto argued that there is not yet a stablecoin that is “purpose-built” for payments. It appears PayPal is angling to fill that gap. Developing its own stablecoin would give PayPal its own payment rail – and a way to bypass traditional payment networks, like Visa/Mastercard and ACH.
PayPal isn’t the only more established player with stablecoin plans. A group of banks has formed the USDF Consortium to create a bank-backed and operated stablecoin. The group includes Synovus, New York Community Bank, FirstBank, and Sterling National, among others. The banks’ initiative is in contrast to other stablecoins, namely Tether, that have been less than transparent about the composition and location of their reserve assets.
The USDF stablecoin will operate on Figure Technologies’ Provenance blockchain. The banks envision use cases including capital call and supply chain financing.
The emergence of stablecoins as an alternative payment rail is basically a fait accompli at this point. The proof of concept has been validated. Now, the race is on to develop not just a stablecoin that is trusted, but to achieve a critical mass of adoption.
Navient Reaches $1.7Bn Settlement on Student Loans
Student loan servicing giant Navient has reached a deal with 39 state attorneys-general. The deal will cancel debts owed by about 66,000 borrowers, worth a combined $1.7Bn. The case stems from allegations that Navient steered borrowers into more expensive forbearance plans rather than income-driven repayment plans they may have qualified for. Navient also faced accusations that its predecessor, Sallie Mae, made subprime loans to borrowers it knew were likely to default.
Banks Loosen Underwriting in Quest for Growth
Most card-issuing banks understandably tightened credit policies way back at the beginning of the pandemic. But as the pandemic has dragged on, banks have welcomed back borrowers with less-than-perfect credit histories in search of loan growth.
According to data from TransUnion, about 20 million cards were issued last year to borrowers with scores below 660 vs. about 20 million in 2020. Even subprime borrowers with scores below 620 have been able to qualify at higher rates. Equifax data shows an increase of 43.5% in cards issued to subprime borrowers in the first 9 months of 2021 vs. the year prior.
Source: Wall Street Journal, St. Louis Fed
The decision to loosen credit policy is an overdue one. The recovery, uneven as it may be, has been underway for a while. Non-bank fintech lenders recognized this and were less risk-averse. This enabled fintech lenders to see a rebound in their loan books, at the same time banks struggled with excess deposits. The move to adjust risk-tolerance should see banks grow tier loan books and boost the profitability of their card portfolios.
TransUnion Brings Traditional Credit Data to Crypto Lenders
Credit checks are coming to crypto. TransUnion has partnered with Spring Labs to make bureau data available to crypto lenders. To date, when crypto holders borrowed money, they typically put up crypto assets as collateral. Because of the volatility of cryptocurrencies, these loans would often be over-collateralized.
With traditional bureau data becoming available, crypto lenders now have an alternate option. They can underwrite a loan based on TransUnion’s data and, potentially, not require collateral at all.
This is a significant step in the intersection of “crypto” and “traditional” financial worlds. Some may dislike the idea of centralized, ‘legacy’ credit data being used to make decisions related to crypto lending. But it represents an opportunity, both for establishment financial services companies to capitalize on their assets, and also for crypto upstarts to leverage those establishment assets to create better products.
Mixed Results as Large Banks Report Earnings
Large banks kicked off earnings season with volatility, with Wells Fargo jumping 3.5% on top and bottom line beats, Citi sliding (1.3)% on lower than expected profits, and JPMorgan falling (6.3)% on a decline in trading revenue and expectations of higher expenses in 2022.
As we saw in previous quarters, consumers have continued to stack cash, with a tight labor market and solid year for equities contributing to a large year-over-year increase in consumer deposits (JPMorgan +20.0%, Wells Fargo +13.3%, Citi +6.5%).
Although consumers saved, they did not hold back on their end of year shopping, with card spending up double digits year-over-year (JPMorgan +25.7%, Citi +19.8%, Wells Fargo +18.4%). With much of the population vaccinated and businesses returning to normal, CEO of Wells Fargo Charles Scharf reported, “Holiday sales were strong with spending up 31% the three weeks leading up to Thanksgiving and that momentum continued post Thanksgiving. All spending categories were up in the fourth quarter compared to a year ago, with the largest increases in travel, fuel, entertainment and dining.”
Average consumer loans have continued to slump, down significantly year-over-year, (Wells Fargo (13.0)%, Citi (9.1)%, JPMorgan (0.7)%). While a strong consumer has not helped weak loan demand, card loans have begun to pick up, with JPMorgan reporting a 5.1% increase year-over-year and Citi CEO Jane Fraser stating, “In the U.S., strong purchase sales continued to be offset by elevated payment rates, but we did see loans increase in branded cards this quarter.”
Citi provided additional insight into its international divestitures of its consumer business, noting it signed deals in 6 of the 13 Asian markets it plans to exit and announced the intention to exit its consumer and SMB business in Mexico.
In The News:
Petition for $2,000 Monthly Stimulus Checks has 3 Million Signatures. ‘Americans Need Some Certainty,’ says Restaurateur who Started it (CNBC, 1/10/2022) The petition, started in March 2020, just crossed 3 million signatures, coming as the COVID resurgence has forced some small businesses to close, Build Back better has stalled, and schools question staying open.
Fed Vice Chairman Richard Clarida to Resign (Wall Street Journal, 1/10/2022) Clarida leaves a couple weeks before his term’s end, after scrutiny over questionable financial transactions he conducted at the start of the pandemic.
China’s Rollout of Digital Yuan Puts Pressure on Fed to Keep Pace (American Banker, 1/7/2022) With China’s rollout of the digital yuan, Mexico’s plan to launch a CBDC by 2024, and the Bahamas plan to phase out domestic checks in favor of its CBDC, the U.S. may be pushed to launch a Federal Reserve digital dollar to keep up.
New York Regulator Appoints Virtual Currencies Chief (Finextra, 1/7/2022) Peter Marton will serve as the deputy superintendent of virtual currency.
Wall Street Banks Set to Report Record Profits for 2021 (Financial Times, 1/8/2022) High investment banking fees and low losses on loans are projected to produce record profits.
Apple Could Reinvent Money Management, Take on PayPal and Robinhood (Bloomberg, 1/9/2022) With its massive network of users, Apple could turn its iPhone and ecosystem into the ultimate financial management tool.
Fintech Led VC Investment Last Year. Here’s What To Look For In 2022 (Crunchbase News, 1/4/2022) Financial services led venture investments with $134Bn invested, a 177% growth YoY.
Fintech: Research Indicates that 9% of Teens Have Traded Crypto, PayPal is Top BNPL Option, Cash is King for Payments (Crowdfund Insider, 1/7/2022) Study shows 70% of teens are aware of crypto with 78% of those who have traded crypto being male.
$9B to Build the Future (a16z, 1/7/2022) Andreessen Horowitz announces $9Bn in new funding, to be allocated to its Growth, Venture, and Bio funds.
Small Lenders Struggle to Maintain Local Identities Amid Hiring Crunch (American Banker, 1/10/2022) Many smaller banks and credit unions are increasing their remote and hybrid positions to combat numerous unfilled roles.
Bank of America to Cut Overdraft Fees to $10 From $35 (Wall Street Journal, 1/11/2022) The moves comes after competitors have reduced or eliminated their overdraft fees.
Medieval Horses in England Were Shockingly Small, Research Reveals (Ancient Origins, 1/10/2022) Turns out the “knights in shining armor” rode into battle on horses the size of modern ponies.