Happy Sunday,

Americans spend most on food in 30 years. Could the Fed hike rates further? Big banks charge higher rates on credit cards. Senators push for Zelle scam refund policy. Monzo aims for £4Bn valuation. Capital One to acquire Discover. How households use BNPL. Hummingbird launches compliance automation tool. Block and Pagaya earnings.

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Some Traders Hedging for Higher Rates

Despite overall economic indicators being quite positive, many Americans remain sour about the financial outlook. Something’s eating at them. Perhaps it is that food costs are accounting for the largest share of household budgets in over 30 years. Meanwhile, while it feels like just last week, we were discussing when the Fed would start cutting rates, now some traders are putting on positions that indicate they believe there is a possibility of further rate hikes. Former Treasury Secretary Lawrence Summers said the quiet part out loud, giving voice to the possibility that “there’s a meaningful chance” the Fed’s next move is up, not down. Though, for its part, no Fed policymaker has publicly suggested further hiking is on the table at this point.

Image: Wall Street Journal

Interest Rates on Big Bank-Issued Cards Significantly Higher Than Smaller Institutions

A recently released survey by the CFPB indicates that large banks charge meaningfully higher interest rates on credit cards compared to their smaller peers. The difference can mean cardholders pay as much as $400-$500 more per year in interest, according to the Bureau’s data. Per the CFPB, the median interest rate of larger issuers in the survey was 28.2% vs. 18.15% for smaller issuers for consumers with “good credit,” typically considered to be scores between 620-719. The CFPB has argued large issuers’ margins have expanded as they price consumers’ rates further above the prime rate. According to a report the Bureau issued last December, in 2022, consumers paid an aggregate of $105Bn in interest payments, which is the highest amount on record. The latest survey comes amid wider pressure from the Bureau, specifically, and Washington, in general, about competition and pricing in the credit card space. The CFPB has proposed policy changes that could substantially lower credit card late fees. And, with new Republican co-sponsors signing on, the Credit Card Competition Act, which would require issuers with more than $100Bn in assets to support a network other than Visa or Mastercard, may actually have a chance of passing.

Dem. Senators Push Early Warning for Policy on Scam Refunds

Senate Democrats are pressing Early Warning Services, owner of bank peer-to-peer payment system Zelle, to codify its reimbursement policy for account holders who are the victims of scams. The issue has been simmering for some time, with banks initially taking the position that, because users often authorize such transactions, the protections of the EFTA do not apply. But facing continued scrutiny from Congress and the CFPB, there has been some movement on Zelle reimbursing scam victims. But it’s unclear, Senate Democrats said, what Zelle’s official policy on the matter is, potentially leaving consumers at the mercy of how their specific bank interprets current guidelines.

Monzo Aims For £4Bn Valuation in New Funding Round

U.K. neobank Monzo, which is a fully licensed bank, is hoping to bump its valuation up to £4Bn as it negotiates its latest funding round. In addition to being a chartered bank, which is not the case for most U.S. neobanks, Monzo also claims most of its growth has come from organic, word-of-mouth referrals, rather than the paid marketing and incentives that U.S. fintechs have traditionally leaned heavily on. Monzo has gradually expanded its feature set, and now offers BNPL-style “Flex Loans” and recently launched an investment feature. Monzo has even hung on in the U.S., where it operates with partner bank Sutton, despite failing to obtain a U.S. charter and relatively slow progress growing here. The additional funding, which is expected to be as much as£350Mn, is expected to be Monzo’s last prior to going public.

Capital One Reaches Deal to Acquire Discover

Bury the lede why don’t we… unquestionably, the biggest banking story of the week was the surprise announcement that Capital One reached an agreement to acquire Discover. The ink on the deal probably hadn’t even dried before battle lines were drawn in Washington, D.C., with Senator Elizabeth Warren (D-MA) urging regulators to block the deal. Still, analyzing the potential competition impacts from the deal, if it were to go through, may not be as straightforward as it seems. While the combination, absent any divestments, would move Capital One from the ninth to the sixth largest bank, the tie up arguably would add considerable heft to Discover’s role as a network competitor to Visa and Mastercard. Capital One could shift its existing credit and debit cards over to Discover, capturing network fees previously paid to Visa and Mastercard for itself. And should the Credit Card Competition Act pass, Discover also stands to benefit, as credit card issuers with more than $100Bn in assets would need to allow merchants to route payments on a network other than Visa or Mastercard, which, in practice, means American Express – or Discover.

“Fragile” vs. “Stable” Household Use BNPL Differently

Both high- and lower-income consumers use buy now, pay later, but they do so in quite different ways. A recently released research note from the New York Fed’s Liberty Street Economics examined how financially “stable” vs. financially “fragile” households used the product. The analysis defined households as “fragile” if they had credit scores below 620 or were declined for credit or had a loan go 30 or more days past due in the past 12 months. Fragile households were more likely to use BNPL plans more frequently and for smaller purchases compared to stable households. Even when controlling for income differences, the different use patterns persisted.

Meanwhile, industry analyst Ron Shevlin is encouraging banks to get on the BNPL bandwagon. The product category isn’t going anywhere and continues to grow in popularity, he says. And while BNPL has its downsides and detractors, BNPL usage among consumers continues to rise. Banks that continue to play “wait and see” are likely to continue to gradually lose payment volume to BNPL providers.

Hummingbird Launches Compliance Automation Tool

Amid ongoing regulatory scrutiny of banks’ financial crime compliance practices, regtech provider Hummingbird has rolled out a new AI-powered automation tool to help with the workload. The new automation product aims to eliminate manual, repetitive work, freeing investigators to spend time on more value-add tasks. Given the high degree of regulation, Hummingbird has focused on ensuring any AI or algorithmic logic it uses is fully transparent and auditable and leverages a “human-in-the-loop” design. The new Hummingbird Automations platform can help assemble information from discrete data sets, making it easier and faster for investigators to do their work. The platform comes with pre-built workflows for common compliance activities, including around KYC/KYB, quality assurance, case preparation, case monitoring, case management, and activity digests.

Block and Pagaya Rise on Earnings

Source: Yahoo Finance

Block and Pagaya reported this week, and both of their stocks rose on positive earnings. Block grew its Cash App monthly transacting actives 9% YoY to 56Mn. 41%, or 23Mn, of the monthly transacting actives were also Cash App Card monthly actives and 3%, or 2Mn of monthly transacting actives also deposit their paychecks into Cash App each month. Growing the % of monthly transacting actives that deposit their paychecks into Cash App will likely be key to Cash App’s goal of becoming “one of the top providers of banking services to households in the United States which earn up to $150,000 per year.” In fact, Cash App Card actives depositing at least $2,000 of paychecks per month spent ~6x more than Card users that do not deposit a paycheck.

Block has continued to expand its lending businesses, with Square Loans (small business loans) facilitating 137k loans, totaling $1.4Bn in originations for the quarter, a 22% increase on a YoY basis. Additionally, Cash App Borrow (short-term loans) reported full-year 2023 originations of $3.6Bn, up 74% YoY, while maintaining a historical loss rate of less than 3% on average.

Looking at BNPL, GMV of $8.6Bn in Q4 was up 25% YoY. Block aims to further integrate Afterpay into Cash App and leverage the Cash App Card to distribute BNPL. Notably, this follows the trend of other BNPL competitors, like Klarna and Affirm, who have rolled out card-based options over the past year. Card-based options give consumers the flexibility to “BNPL anywhere”.

Turning to Pagaya, the fintech reported network volume of $2,380Mn, a 33% increase YoY, driven by the ramp-up of new partnerships in auto, PoS and single-family rental.

Despite the increase in network volume, credit has not deteriorated, with personal loan portfolio delinquencies (reported on a 3-month lag) flat the past few quarters, and lower from a year prior. Additionally, auto loan portfolio delinquencies (reported on a 6-month lag) were lower from a year prior.

A greater share of Pagaya’s FRLPC % (fee revenue less production costs as a % of network volume) is coming from its lending partner product (representing net AI integration fees), compared to its investor product (representing capital markets execution and contract fees). The company reported that, “Approximately ~40% of our lending partnerships are generating FRLPC from both our lending and investor products, while the remaining ~60% are only generating FRLPC from our investor product, representing significant upside for future margin improvement.”

Wrapping things up, Pagaya continued to grow and diversify its ABS investor base in 2023. As of January, it reported 109 ABS investors, up from 67 in 4Q22 and 89 in 3Q23. At the same time, ~50% of funding came from the top 5 ABS investors in 2023, down from ~70% in 2022.

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:

Capital One to Buy Discover for $35 Billion in Top 2024 Deal (Bloomberg, 2/19/2024) Capital One has agreed to buy Discover in an all-stock transaction, pending regulatory approval.

What Capital One would get from buying Discover (American Banker, 2/19/2024) Much of the focus has been on Discover’s card network, but there are other aspects to the deal.

5 key drivers of the Capital One-Discover merger (American Banker, 2/20/2024 More analysis on the drivers of Capital One’s acquisition of Discover

Morgan Stanley-Backed TomoCredit Isn’t Paying Its Bills, Faces Mounting Legal Challenges (Fintech Business Weekly, 2/18/2024) The credit card for immigrants startup is facing numerous lawsuits, including for failing to pay its bills.

Lessons from JPMorgan’s fallout with the fintech Viva Wallet (American Banker, 2/16/2024) JPMorgan may have some buyer’s remorse over its deal with Greek fintech Viva Wallet.

OpenPayd, TrueLayer Offer Instant Account-to-Account Payments (PYMNTS, 2/20/2024) The two companies are partnering to enable A2A payments in the U.S.

Failed Cross-Border Payments Cost US Merchants an Estimated $3.8B (PYMNTS, 2/21/2024) The economic cost of failed international payments totals some $3.8Bn.

Brookfield Creating Pool to Invest in Financial Infrastructure (Bloomberg, 2/21/2024) The asset manager is starting a financial infrastructure group within its PE business.

Prizeout Launches Cash-Back Products for Credit Unions (PYMNTS, 2/21/2024) The new offering from Prizeout, CashBack+, aims to help credit unions boost non-interest income.

Lighter Fare:

How a $2.55 slider became NYC’s most popular burger overnight (NY Post, 2/20/2024) A burger for $2.55 in New York? Sign us up!