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CPI Higher Than Expected; Visa & ServiceNow Team Up; Klarna One-Click Checkout

By Cole Gottlieb

February 18, 2024

Happy Sunday,

Higher than expected inflation. Visa and ServiceNow team up to simplify dispute management. Revolut offers eSIMs now. FIS and Banked partner on account-to-account payments. Credit union services orgs offer BNPL-like capability. Klarna offers one-click checkout-style merchant solution. TransUnion credit data. Upstart, Robinhood, Coinbase report earnings.

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CPI Print Dashes Hopes for Early Rate Cuts

An unexpectedly hot inflation print is clouding the outlook for a possible start to rate cutting. CPI increased more than expected on both a month-over-month and year-over-year basis. Consumer prices were up 3.1% in January vs the year prior, higher than the predicted 2.9% increase. The news is reinforcing that the path back to stable 2% inflation is likely to be a bumpy one. Stock prices, which have been buoyed by hopes of rate cuts sooner rather than later, dropped on the news.

Image: Wall Street Journal

Visa And ServiceNow Team Up for Chargeback Management Tool

Visa and ServiceNow have teamed up to develop a new disputes management tool for credit and debit card issuers. The co-developed offering, dubbed “ServiceNow Disputes Management, Built with Visa,” leverages generative AI to help consolidate data from multiple systems to streamline the process for customer service agents handling disputes. The growing complexity of payments systems, unique chargeback rules across different card brand and EFT PIN networks, and historically manual processes have become increasingly cumbersome for banks to navigate. The new offering will integrate directly with the Visa Resolve Online dispute management system, enabling agents to use a single system to investigate and resolve chargebacks, rather than needing to toggle between and manually collate data from multiple tools. Industry analysts suggest if the tool gains traction, it could mean a drop in revenue for processors, who historically have generated revenue from their role as intermediaries between banks and card networks in the dispute resolution process, though any revenue impact is likely to be minimal.

In other Visa-related news, the company is now enabling corporate card issuers to enable employees to add those cards to digital wallets, like those provided by Apple and Google. Enabling digital wallets can offer users improved convenience, flexibility, and security. The first Visa partner to roll out the support is Regions Bank.

Revolut to Offer U.K. Users International Cell Service

Revolut is continuing to lean into the travel space, this time, with a mobile phone-related offering. The company gained traction in its early days by offering U.K. consumers competitive foreign exchange rates when traveling abroad, something often unavailable from establish British banks. Now, Revolut is aiming to solve the pain of expensive international roaming charges by integrating an eSIM offering in its banking app. Unlike traditional physical SIM cards, eSIMs can be downloaded and virtually installed, making it extremely convenient to temporarily use an alternate mobile service or network while traveling abroad. Revolut “Ultra” plan users will gain access to 3GB worth of data usage each month, which they can use globally. The appeal of the offering has grown in the wake of Brexit, as many U.K. carriers no longer allow users to use their service in Europe without hefty additional charges.

FIS and Banked Partner on Pay-By-Bank Solution

Core bank provider FIS and Banked have announced a partnership to “capitalize on the momentum” of real-time payments by facilitating pay-by-bank solutions. Banked enables consumers and businesses to make payments directly from their bank accounts without entering any financial data. The move makes sense, given a large number of banks FIS serves are not necessarily major credit card issuers, so have less to lose from the potential for account-to-account payments to displace traditional payment methods.

Credit Union Service Organizations Offer BNPL-Style Card Option

Credit unions are trying to put their own spin on popular buy now, pay later-style financing plans. Two credit union services organizations, PSCU and Co-op Solutions, have created products that enable consumers to select qualifying transactions and pay them back in installments over time separately from an existing credit card account. Rather than choosing to use the plan at the point of sale, credit unions can target users shortly after they’ve made qualifying purchases on their credit union-issued credit card, somewhat akin to “plan it”-style options on bank credit card programs. The option gives consumers another tool for cashflow management.

Klarna Offers One-Click Checkout-Style Integration

Klarna, best known for its BNPL offering, has launched its “Sign in with Klarna” offering, which attempts to streamline shoppers’ checkout experience by sharing data Klarna already has to reduce users’ need to fill out forms. The consumer-permission data can also be used by merchants to create personalized promotions and offers. The capability is already live in some 23 countries, including Klarna’s native Sweden and the United States. But while the feature has resonated in Europe, adoption in the U.S. may face an uphill battle. Numerous similar “one-click checkout” solutions, like Bolt and Fast, have failed to gain meaningful traction. Platforms as varied as Shopify (Shop Pay) and Stripe (Link) offer competing solutions.

TransUnion Releases Consumer Credit Data

TransUnion just released its monthly credit snapshot for January. In January, 60+ DPDs increased (MoM) for Bankcard +7bps, Mortgage +7bps, and Auto +6bps. This marks the sixth consecutive month of DPD increases for these products. Unsecured Personal Loans ("UPLs") 60+ DPDs decreased (2)bps, after five straight months of increases.

Looking at bankcard, 90+ DPDs rose 6bps MoM, marking a seventh straight month of increases and 30+ DPDs rose 8bps, marking an eighth straight month of increases. Q1 2023 vintage DPDs continue to track higher than Q1 2022 and well above Q1 2018-2021 vintages. At the same time, average bankcard balances fell (0.7)% MoM, to $6,295, though some of this is likely attributable to seasonality.

Source: TransUnion

Turning to originations, we got information on UPL origination volume for the October 2023 – November 2023 period (lag due to reporting time). November fintech UPL originations fell for higher risk tiers with super prime (18.0)%, prime plus (12.5)% and prime (5.7)%, while lower risk tiers reported growth, with near prime +8.9 and subprime +4.0% on a MoM basis. All risk tiers remained below November 2022 levels, with super prime (0.7)%, prime plus (12.0)%, prime (39.1)%, near prime (51.9)%, and subprime (54.6)%.

Credit unions built on October’s MoM UPL origination gains, reporting increases for prime plus +0.9%, prime +12.6%, near prime +19.8%, and subprime +44.7%. Only super prime (7.1)% saw declines. On a YoY basis, super prime +19.6% and prime plus +3.6% originations were above 2022 levels, while prime (5.1)%, near prime (4.6)% and subprime (14.5)% lagged.

Finance companies reported MoM UPL origination declines for super prime (4.7)% and prime plus (4.6)%, while reporting origination growth for prime +2.9%, near prime +5.2% and subprime +9.6%. On a YoY basis, all risk tiers remained below November 2022 levels, with super prime (20.2)%, prime plus (14.3)%, prime (0.9)%, near prime (0.1)% and subprime (3.6)%.

Banks reversed October UPL origination growth, reporting November declines across super prime (9.0)%, prime plus (15.8)%, prime (15.9)%, near prime (7.6)% and subprime (3.9)%. Bank originations were higher than November 2022 levels for super prime +27.7%, near prime +11.5% and subprime +26.9%, while prime plus (9.8)% and prime (7.1)% lagged 2022 levels.

Finance companies grew their lead in UPL balances, to 28.1% of the total in January. Fintech companies followed, accounting for 27.7%, while banks accounted for 24.0% and credit unions for 20.2%. Average UPL balances per consumer were down (0.4)% on a MoM basis, to $11,880 in January.

Overall, consumers are missing payments at a greater rate. UPL DPDs paused their rise, while other forms of consumer credit (auto, bankcard, mortgage) continued to rise. UPL’s Q1 2023 vintage continues to perform better than Q1 2022, likely due to mid-2022 credit tightening.

Source: TransUnion

Q1 2023’s bankcard vintage is performing worse than 2022, while auto’s Q1 2023 vintage is at comparable levels to 2022, Both bankcard and auto vintages for 2022/23 are performing worse than historic cohorts (2018-2021).

Source: TransUnion

Turning to fintech, fintech UPL originations remain well below 2022 levels, especially for the below prime contingent (down 50%+ YoY for both the near prime and subprime risk tiers). Notably, fintechs pursued more aggressive growth from 2021-1H22, expanding credit access to more consumers. At this point, they have yet to return to those levels of origination.

Earnings Season Continues

Source: Yahoo Finance

Kicking things off, fintech lender Upstart reported earnings, and its transaction volume (origination from bank partners) fell (19)% YoY due to tighter credit underwriting. At the same time, the conversion rate rose to 11.6%, from 10.5% a year prior. Upstart plans to maintain tight credit standards, even for borrowers with higher credit scores. CFO Sanjay Datta stated, “Within unsecured lending, our view is that the near-term risk in credit has shifted to the primer customer segments. And as a result, we are becoming increasingly conservative in our underwriting of these higher FICO borrowers.”

While tighter credit has impacted origination volumes, it has led to better loan performance in more recent vintages. After trailing target cash flows for much of the past few years, recent Upstart vintages are performing in line with target cash flows (see image below).

Source: Upstart Earnings Presentation

Looking ahead, Upstart is moving to allow personal loan borrowers to provide collateral (potentially auto, home equity) to support their applications. Borrowers may want to provide collateral to get a better rate or increase the odds of approval. CEO Dave Girouard explained, “In the coming months, we expect to release an optional feature that allows borrowers to provide collateral to support their personal loan application.”

Turning to the exchanges, both Coinbase and Robinhood’s transaction revenue was helped by the rise in crypto prices and volatility. Coinbase’s transaction revenue was up 64% YoY and Robinhood’s was up 8% YoY.

Additionally, both exchanges cut headcount to reduce costs with Coinbase reducing staff by (24)% and Robinhood reducing staff by (6)% from the year prior.

Robinhood continued to grow its assets under custody (65% YoY and 19% QoQ), taking market share from incumbents. CEO Vlad Tenev said, “We won head-to-head net asset transfers from all the other major brokerages in Q4, and that includes Fidelity. So, that means that more assets actually flowed from Fidelity to Robinhood in Q4 than the other way around.”

Furthermore, Robinhood’s early success in retirement accounts is meaningful, as it may represent a “stickier” asset base. Looking ahead, Robinhood plans to lean into Robinhood Gold, expand into credit cards, and launch new account types (i.e. joint accounts).

Coinbase has avoided pressure on its fee rates with CFO Alesia Haas stating, “Since we went public, we've received a question on fee rate and fee rate compression or cannibalization every quarter. We have yet to see that phenomenon on our platform, and we have yet to see that as a result of the ETFs as well.” Coinbase began its role as custodian for 8 of the 11 Bitcoin ETFs in January and has been named as the custodian for 5 of the 8 ETH ETF applications. CFO Haas explained just how much volume the Bitcoin ETFs have received, “So across the entire industry, we've seen over $4 billion of net inflows into spot Bitcoin ETFs. The Bitcoin ETFs are breaking records. When gold launched in November 2004, it took one year to get to $3 billion. These ETFs did that in a few weeks.”

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:

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Do fintechs for kids do enough to protect their privacy? (American Banker, 2/12/2024) With concerns about childrens’ privacy online intensifying, some are asking if fintechs are doing enough.

Credit tightened in 4Q — but lenders are more upbeat about 2024 (American Banker, 2/13/2024) Fed’s SLOOS survey shows pace of credit tightening has eased.

Will California's gun law place a target on card networks? (American Banker, 2/12/2024) A new California law requires payment codes that identify firearm and ammunition purchases in the state.

Consumers Increasingly Trade Down to Less Expensive Retailers (PYMNTS, 2/14/2024) Consumers are pinching pennies by shopping at less expensive stores.

Citi tests tokenisation of private funds (Finextra, 2/14/2024) Citi, Wellington Management, and WisdomTree carried out the proof of concept.

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