Coronavirus Shakes Markets; Intuit Eyes More FinTechs; Figure’s On-Chain Securitization

by | Mar 15, 2020 | Blog | 0 comments

Greetings,

U.S. markets experienced their largest up days and down days since the depths of the 2008 crisis and 1987 stock market crash. Credit spread deals issued in Q4 have widened 40 to 50% – ultimately increasing the costs of borrowing for consumers and small businesses.
 
Some economists are predicting a 2% negative GDP print for Q2 and are now expecting a 0.1% to 2% annual growth rate. Economists expect growth to bounce back in the third quarter as fiscal stimulus works its way through the economy and factories reopen to stabilize supply chains.

These estimates, based on data a few days old, already seem outdated. It seems inevitable that economic activity would shutter further as governors and mayors enact policies to close restaurants, bars, sporting events, and limit public spaces (see Hoboken for instance) to bend the curve and avoid an Italian scenario. Public health officials are considering a 14-day or 30-day self-quarantined lock-down to blunt community spread.

Larry Summers indicates that the likelihood of a recession stands at 80 or 90%. Summers’ view is that neither monetary nor fiscal policy can address a fundamental issue – that tens of millions of Americans wake-up concerned about their or loved ones’ health. Rates are already low and the Fed is out of ammunition. (That said, the Fed’s $1 Tn intervention into the overnight repo market was a welcome move to stabilize bank-to-bank funding and payments).
 
How Does the “First Wave” Impact Consumer Credit Portfolios?

As we noted in last week’s newsletter, the primary credit risk factors center on retail-oriented small businesses. “Gig economy” and hourly wage workers that work for retail establishments will be the first to feel hits to income. 
 
This sector of consumer credit tends to be under-banked and has less access to consumer credit. As a share of overall balances outstanding, they are not a meaningful size of the market and are under-represented in the prime portfolios of consumer lenders such as SoFi, LendingClub, Prosper, Marlette, and others. That said, there are FinTechs that specialize in lending to these sub-segments that could feel more losses if there are delays in policy or stimulus response.
 
Stimulus Policy Response
 
The House passed a Coronavirus Response Bill that the Senate is expected to approve this week. This bill would provide relief by:

  • Offering free testing to individuals (that meet certain criteria)
  • 14 days of paid sick leave
  • 3 months of paid emergency leave
    • Employers will be reimbursed through tax credits
    • Exemption for small businesses < 50 employees that can demonstrate hardship

The bill is seen as the first installment of stimulus packages. The deal was executed quickly between House Speaker Pelosi and Treasury Secretary Mnuchin in a good sign of bipartisan focus.

Looking Ahead (Some Good News Please!?)

It is morbid and unpleasant to discuss the tragic loss of life with cold numbers. Economically, it is worth saying that the long-term productive capacity of the U.S. is not diminished. Even under the most severe mortality estimates (~1.5 MM deaths), those numbers are smaller than the net immigration to the U.S. (~3 MM new workers) or new college graduates per year (~3.9 MM). Moreover, the U.S. banks are extremely well-capitalized, unlike the 2008 crisis. The borrowing rates for the federal government are extremely low and provide plenty of room for stimulus or softening the blow to impacted communities.

There will be adjustments to daily life that will be felt for several quarters at a minimum. These adjustments include ramping up health care capacity, social distancing, small business lending support, consumer stimulus measures, and changes in how business is conducted.

The main question is whether those adjustments will take place in a speedy, orderly, and coordinated way or in a reactive, hap-hazard, and lagged manner. 

Coronavirus Stressing Funding Markets

Here are a few highlights from Bloomberg on how the outbreak and work-from-home may hit Funding Markets.

  • In an extreme scenario, dealer-banks could be flooded with an extra $200 billion worth of U.S. government debt as market participants rush to secure extra financing.
  • New York and London are seeing “split” operations as big banks and dealers divide their workforces and instruct traders to work from home.
  • “We are already seeing market-making severely disrupted, and to the extent that logistical frictions prevent ‘human’ traders from providing a backstop, liquidity-transaction costs can stay very high compared to even recent history,” said the JPMorgan team. 

Industry News – LendingClub, Square, and Apple

Scott Sanborn, CEO of LendingClub, provided a much anticipated interview with Peter Renton and provided more perspective on the pending Radius Bank acquisition and a glimpse of the new “marketplace bank.” 

Square Cofounder, Jim McKelvey, describes how Square was able to take on Amazon when the tech giant introduced its own POS reader – and won.

Forbes has data on how well the new Apple Card is doing. Highlights:

  • Roughly 2.2% of all U.S. adults with a credit card already have the Apple Card.
  • Roughly 3.1 million Americans — 2.2% of all U.S. adults with a credit card — have the Apple Card already.
  • Most are younger consumers — 70% are Millennials (nearly evenly split between younger Millennials in their 20s and older millennials in their 30s). Just 3% are Baby Boomers, by the way.
  • Still unclear what the profitability of the deal will mean for GS, which competed aggressively to win the business.

Intuit is on the hunt for more acquisitions.

  • Intuit could potentially buy Credit Sesame, Finicity, and NerdWallet. Finicity is potentially an acquisition target because it is a data aggregator. Finicity is similar to recent Visa acquisition Plaid, which was bought for $5.3 billion in January. Plaid’s APIs help customers connect bank accounts with finance apps. Credit Sesame was expected to go public later this year or possibly next, and it’s essentially a smaller version of Credit Karma.
  • The volatility of the market, especially since being affected by the coronavirus, could cause a drop in some mergers and acquisitions (M&A) valuations and provide buying opportunities for interested companies.

In financing news, Alipay owner Ant Financial takes minority stake in Klarna (Tech Crunch, 03/04/2020) Ant Financial Group announced that it is taking a minority stake in the Swedish payments platform, Klarna.

  • Ant Financial Group, the owner of China’s Alipay payment platform, has announced it’s taking a minority stake in Swedish payments platform Klarna. Klarna has a strong European presence and a flagship product that lets shoppers buy now and pay later in interest-free installments (typically 14 or 30 days after the purchase).
  • The pair have not disclosed terms of the deal, but Reuters reported the stake amounts to less than 1% and was made up of existing and new shares. It also cites its source saying the stake was done at a “slight uptick” to Klarna’s $460 million funding round last August, which valued the company at $5.5BN.

Figure executed a $150M securitization of HELOC loans “on chain”. Figure Technologies, led by CEO, Mike Cagney, executed the first such transaction in which all aspects of the process were managed on a blockchain. Everything from the origination of the loans to the issuance of the bonds to the collection of borrowers’ monthly payments is run on Provenance, Figure’s blockchain and powered by IBM’s HyperLedger. US brokerage Jefferies Group and Japanese financial giant, Nomura, managed the bond sale for Figure. 

Chart of the Week – U.S. Yields Fall Below 1% Across the Curve

Source: Bloomberg, PeerIQ

PeerIQ New Hire:

Matthew Aquiles. Matthew has recently joined PeerIQ as a Software Engineer with his main focus on the backend. Previously, Matthew worked as a software engineer at JPMorgan Chase, where he developed a content management platform for investment banking applications. He also has experience working in fields such as the internet of things, radio frequency engineering, and portfolio management. Matthew graduated from Stevens Institute of Technology, where he obtained a Bachelor of Engineering Degree in Computer Engineering with a concentration in Software Engineering. Aside from programming and computers in general, some of Matthew’s hobbies include video games, music, soccer, and playing with his dog, Frank.

PeerIQ Conferences:

PeerIQ will be at LendIt Fintech USA 2020 – with a lot of hand sanitizer.

PeerIQ CEO, Ram Ahluwalia, will be speaking on May 13th at 3:15 p.m. Reach out if you’d like to connect!

 

Industry News: 

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