Happy Sunday,

The Fed held rates steady, but don’t expect cuts soon. Consumer confidence improved. Job openings rose. Blue Ridge and Choice hit with regulatory enforcement actions. Apple celebrates a 12Mn user milestone. Upgrade and FairPlay partner. Amazon teams up with SellersFi, Kueski. Block and PayPal plan layoffs. Fintechs report earnings.

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Consumer Confidence Improves

Are rate hikes over? It’s certainly looking that way. The Fed held rates steady at its FOMC meeting last week. But investors who are hoping for rate cuts are likely to be disappointed. The Fed has signaled it does not expect to begin cutting rates until it has greater confidence that inflation is “sustainably” moving towards its long-term 2% target. Meanwhile, consumer confidence has improved. The measure jumped to 114.8 in January, the highest it has been since late 2021. Job openings unexpectedly rose in December to the highest level in three months, the Department of Labor JOLTS survey showed. Still, quit rates remain lower than they have been, suggesting Americans are hesitant about switching jobs even as the employment market remains strong.

Image: Bloomberg

Blue Ridge, Choice Bank Face Enforcement Actions

2024 is already shaping up to be a tough year from banks that engage in banking-as-a-service business models. Last week saw two banks in the space hit with enforcement actions. Blue Ridge Bank, which had entered into a formal agreement with the OCC in 2022, reached a consent order with the regulator over largely similar issues as the prior action. Blue Ridge worked with at least two “middleware” platforms, Unit and Increase, as well as having numerous direct relationships with fintechs. Choice Bank reached a consent order with its regulator, the FDIC. Like Blue Ridge, Choice has worked with intermediary platform Unit and has direct relationships with Mercury, Lili, and Current. Both enforcement actions centered around the banks’ BSA/AML compliance and oversight of their third-party fintech programs. The action against Blue Ridge is notable as it is the second one against the bank in a short period of time and because it classifies the bank as being in “troubled” condition. Consensus expectation is that there will be more consent orders in the near future, as bank regulators appear to be taking a close look at any bank that has fintech partner programs.

Apple Card Touts a 12Mn User Milestone

Apple last week announced it has reached more than 12Mn users of its Apple Card credit card. More than 1Mn cardholders are sharing access through Apple’s Family Sharing feature. And, perhaps most interestingly, some 30% of Apple Card users make more than two or more payments towards their balance each month. More than 200,000 applicants who were initially declined were subsequently able to be approved after enrolling in Apple’s “Path to Apple Card” program. Apple’s high-yield savings feature, which launched last April, quickly accrued some $10Bn in deposits for bank partner Goldman Sachs. But Apple’s financial services journey hasn’t been without bumps in the road. Shortly after the launch of Apple Card, the company and Goldman faced allegations of gender discrimination, though an investigation by the NYDFS cleared the companies of any illegal discrimination. More recently, as Goldman has moved to wind down its consumer operations, cracks have emerged in the partnership, with Goldman reportedly looking to find another issuer to take over the deal.

Upgrade Selects FairPlay for Fair Lending Compliance

Upgrade, which offers banking and credit products, announced it is working with FairPlay, a vendor that helps consumer lenders to assess fair lending compliance. Upgrade intends to use FairPlay’s offering to test, monitor, and improve the fairness of its underwriting algorithms. With artificial intelligence increasingly on regulators’ radar, lenders that use AI techniques should be prepared to demonstrate they are taking adequate steps to monitor and ensure fair lending compliance of their models.

Amazon Partners With SellersFi, Kueski

Amazon has inked a couple of new financial partnerships. In the U.S., the ecommerce giant has partnered with SellersFi to offer lines of credit to third-party sellers on Amazon’s platform. Sellers can get access to up to $10Mn through the offering to support their stores. Many third-party sellers on Amazon are small businesses that may not have easy access to credit through traditional banking channels. In Mexico, Amazon announced a partnership with consumer buy now, pay later provider Kueski. The partnership will enable shoppers without credit cards to pay for Amazon purchases with up to 12 bi-weekly installments.

Block, PayPal Layoffs

Fintechs, especially publicly traded ones, continue to face pressure to improve their bottom lines by cutting headcount. Last week, Block, which operates Square and Cash App, announced a round of layoffs as it seeks to keep its total workforce below 12,000 employees. The company has said it will reach the target of 12,000 or fewer employees by the end of this year.

PayPal, fresh on the heels of its widely panned product announcements, is also kicking off another round of layoffs. It’s expected that about 9% of the company, or 2,500 workers, will be impacted. This is in addition to a cut of 2,000 employees about a year ago and comes amidst changes to PayPal’s executive team.

Fintechs Report Earnings

Source: Yahoo Finance

This week, fintech lenders reported earnings, with originations at SoFi +45.1% YoY and Enova +22.7% YoY significantly higher while LendingClub (29.3)% YoY lagged year ago results. On a QoQ basis, Enova +13.1% and LendingClub +8.1% grew originations while SoFi (16.3)% saw a decline.

SoFi expects its 2024 personal loan originations to be relatively flat or down versus 2023 and has continued to reduce its credit box. In December, SoFi reduced underwriting by eliminating what it calls “tier six and seven” and plans to continue to reduce its credit box.

Enova’s consumer originations jumped +48% YoY, on the back of increased marketing spend. Additionally, consumers may be turning to Enova’s higher interest rate loans (APRs 34%+) as access to unsecured personal loans has declined.

Of LendingClub’s $1,630Mn in originations, roughly $1Bn can be attributed to its structured certificate program. As a reminder, LendingClub launched its structured certificates program in Q2 of last year under which “LendingClub retains the senior note and sells the residual certificate on a pool of loans to a marketplace buyer at a predetermined price” (See comparison chart below for more info).

Source: LendingClub Earnings Presentation

So, how have these loans held up? Consistent with broader trends, we saw NCOs rise YoY at LendingClub +360bps to 6.6% and Enova (Consumer) +100bps to 17.3%. On a QoQ basis, LendingClub NCOs were up +150bps and Enova (Consumer) NCOs were up +180bps, in part driven by seasonality. LendingClub does serve a higher credit risk tier than Enova, with CEO Scott Sanborn explaining, “Our current originations are focused on prime consumers, with loans coming onto our balance sheet having a weighted average FICO of around 750.” While Enova’s (Consumer) NCO ratio grew to 17.3%, its 30+ DPDs were lower, at 7.2% for the quarter.

SoFi reported that its personal loan weighted average annual default rate rose sequentially to 4.8%, from 4.6% the quarter prior. SoFi’s performance is likely helped by the fact that its personal loan borrowers hold a high average FICO score (744) and income ($171k).

Deposits have been key to funding these originations, with both SoFi +18.8% QoQ and LendingClub +4.8% QoQ reporting deposit growth. With consumers seeking yield, these fintechs have had to offer competitive rates to garner deposits. SoFi offered an average yield of 4.28% (+16bps QoQ) and LendingClub offered an average yield of 4.45% (+29bps QoQ). Despite the cost, these deposits can be key to funding originations. SoFi noted that it was able to reduce its warehouse facilities utilized by over $700Mn by turning to deposits, at a 218bps cheaper rate.

Mastercard reported a +10.3% YoY increase in its GDV (gross dollar volume). As we have covered the past few weeks, most data has suggested that consumer spending remained strong through year end 2023.

Mastercard has continued to add new programs, with CEO Michael Miebach reporting that, “In the co-brand space, we’re partnering with J. Crew and Synchrony in the U.S. to launch the retailer’s first co-branded digital first card. And in the public sector, we have an exclusive partnership with Fiserv Money Network for all U.S. state and federal government benefit and wage disbursement debit programs. As part of our partnership, we are thrilled to launch with the California Economic Development Department in February, the largest unemployment program in the United States.”

Student lender Navient announced strategic actions to simplify the company, including outsourcing its student loan servicing and creating a variable expense model, initiating exploration of strategic options for its business processing division, including a potential divestment, and intending to streamline its shared service infrastructure and corporate footprint. As part of these strategic actions, Navient entered a binding letter of intent to transition its student loan servicing to MOHELA (and expects to finalize the transaction in 1H24).

Navient CEO David Yowan explained the move to outsource, stating, “Our current costs were found to be comparable to third-party providers. But it was also clear that our in-house cost to service would not continue to be competitive with third-party costs as our legacy portfolio amortizes and our economies of scale begin to disappear. As a result, we’ve decided to transition to an outsourced servicing model.”

Hi all, Cole here. If you’ve made it this far, thank you for being a loyal subscriber to the newsletter. Looking for more updates on the companies covered during earnings season? Follow/connect with me on LinkedIn and join my Discord server for exclusive access to earnings updates (and archives), including bullet notes on important info from earnings releases, key quotes from earnings calls, and relevant slides from decks.

In the News:

California benefits contract shifts to Fiserv from Bank of America (American Banker, 1/26/2024) Bank of America is out, Fiserv is in to support California’s benefits programs.

Bread cuts expenses as charge-offs rise sharply (American Banker, 1/25/2024) Amid inflation and higher charge offs, Bread Financial is looking to cut costs.

Fintech Funding Freeze May Thaw in 2024. But Failures May Multiply, Too (The Financial Brand, 1/29/2024) More startups may get funded this year, but more are expected to shut down too.

YouLend completes securitization deal with JPMorgan (Finextra, 1/29/2024) Embedded finance platform YouLend completed a securitization deal that will enable it to extend an additional £4Bn in financing.

‘More impactful than the internet’: How AI will reshape banking jobs (American Banker, 1/29/2024) AI is unlikely to replace bankers, but it is likely to change the kind of work they do.

Cross River’s lending team achieves strong growth across diverse asset classes in 2023 (ROI NJ, 1/30/2024) Cross River demonstrated impressive growth across multiple lending segments.

Synchrony and PatientNow Team to Help Fund Elective Procedures (PYMNTS, 1/30/2024) Practice management company PatientNow is partnering to offer patient financing via Synchrony.

NY Community Bancorp Plunges as Real Estate Risks Jolt Market (Bloomberg, 1/31/2024) NYCB, which was viewed as a winner in last spring’s banking crisis, is reeling from a jump in loan loss provisions from souring CRE loans.

Lighter Fare:

First-Ever Footage of a Newborn Great White Shark Has Scientists in a Frenzy (Science Alert, 1/30/2024) An amateur wildlife filmmaker captured images of a just-born great white shark.