This week, we look at what the COVID recovery means for forbearance protections, the latest crypto crash, and Marqeta’s S-1.
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COVID Recovery Keeps Rolling
Unemployment claims dropped 34,000 to 444,000 in the week ended May 15. This marks the lowest level since March 2020.
Companies are raising wages to compete for workers. This week, Bank of America committed to raise its minimum wage to $25 an hour by 2025.
U.S. manufacturing PMI for May beat expectations with a reading of 61.5. U.S. factory activity increased as the economy continues to recover.
Money Printer Starting to Slow
Fed officials James Bullard and Raphael Bostic signaled a willingness to gradually shift from easy-money policies. Minutes from the April 27–28 Fed meeting confirmed officials were open to future discussions about slowing the $120Bn of monthly bond purchases.
The news comes as CPI data is starting to coming in hot (after clocking-in below the 2% target rate for over decade).
Acting Comptroller Michael Hsu’s OCC — Concerned About Complacency in Banking System
The Acting Comptroller provided testimony to Congress. He identified the following priorities requiring ‘immediate attention’:
- Guarding against complacency by banks
- Reducing inequality in banking,
- Adapting to digitalization
- Acting on the risks that climate change presents to the financial system
Hsu cited how pre-covid, banks avoided SPACs and crypto-related activities. That has changed as banks seek to grow share or avoid losing customers.
Here’s an excerpt from “Adapting to Digitization” that gives perspective on Hsu’s thought process:
“For me, it is hard not to feel some déjà vu. In the 1990s and 2000s, “disintermediation” was the watchword. Securities firms and capital markets were disintermediating bank lending and the innovation was focused on financial engineering (credit default swaps, collateralized debt obligations, etc.). While this led to greater efficiency in the allocation of credit from savers to borrowers, it also gave rise to a large and less regulated shadow banking system, which eventually collapsed and contributed to the Great Recession.
Today, banks are again being disintermediated but in a different way. Instead of securities firms and capital markets, it is fintechs and technology platforms. Instead of lending, it is payments processing. Instead of financial engineering, it is application programming interfaces, machine learning, and distributed ledgers.
I believe these trends cannot be stopped. They bring great promise, but also risks. Banks and the regulatory community must adapt to them. My primary concern is that the regulatory community is taking a fragmented agency-by-agency approach to these trends, just as it did in the 1990s and 2000s.”
What’s our take?
The OCC under Brian Brooks clarified rules and regs that are sound interpretive guidance on matters including True Lender and crypto.
However, that guidance was issued in a short tenure. Also, the regulatory chief came from industry (Coinbase), and the regulator went back to industry (now serving as the CEO of Binance US).
Even if the substance is on the mark, it makes sense for the new Acting Comptroller to do a thoughtful review of recently issued guidance.
If executed in coordination with various agencies, then the regulatory foundation will have a surer foundation to unlock the “promise” noted above.
Crypto volatility continued this week — the value of bitcoin was down by as much as 31%.
Two of the world’s largest crypto exchanges, Binance and Coinbase, experienced outages. More than 775,000 traders had their accounts liquidated, equaling $8.6 Bn worth of crypto.
Some unknown number of these traders were unable to access their accounts in a scene reminiscent of the Robinhood/Gamestop debacle a few months ago.
The outages this week show just how fragile the market infrastructure is for a ~$2 Tn asset class category. Notably, the DeFi exchanges (DEX’s) and lending protocols experienced no outage or liquidations (although the costs of transacting in gas fees were high — sometimes > $1,000 / transaction).
GameStop is a drop in the bucket compared to the marketcap of cryptocurrencies. Nearly 60 MM users have profiles on Coinbase. The asset class continues to go mainstream at an astonishing pace.
It’s hard not to expect regulators to define consumer and investor protection guardrails in the coming months.
How regulators will approach this is another matter, after all tokens are no securities — but the SEC is the agency responsible for the Investor Protection mandate.
Daily Pay Secures $175 MM in Series D Funding and $325 MM in Credit Capital
DailyPay, led by CEO Jason Lee, has raised $175 MM. The Series D funding was led by Carrick Capital Partners and other existing investors. The early wage fintech startup also secured $325 MM of credit capital from various sources.
DailyPay claims that 80% of Fortune 200 companies that offer on-demand pay. The company increased its revenue by 141% in 2020 and released a suite of new products and services that benefit employers, including tools to enable off-cycle payments and remit employee reward payments.
What’s our take? BNPL was hot. Payroll advance FinTech solutions are the “New New Thing”.
Marqeta’s S-1 Filing
Oakland-based Marqeta has filed its S-1.
First off, we want to wish Marqeta, led by CEO Jason Gardner, a hearty congratulations and success in their upcoming IPO!
Unless you are living under a rock, you may know Marqeta is a non-bank that specializes in helping companies issue debit and credit cards. They are focused on cards issued to employees or contract workers (think Instacart, DoorDash, and Square).
Marqeta is targeting a $10 Bn valuation, although there appear to be private market transactions upwards of $16 Bn. The company generated $350 MM in annualized net revenue in Q4 2020.
That implies a P/S ratio in the range of 28 to 45.
Revenue growth is clocking in at 100% YoY. Growth is strong but showing signs of deceleration:
- For instance, 2020 Total Processing Volume (TPV) grew 177% to $60.1Bn.
- The same YOY volume growth was 167% in Q1.
Marqeta’s Net Income was ($48 MM) in 2020, a reduced burn from ($58 MM) the year before. Marqeta is generating gross margins in the mid-40s. Those margins are up from 38% same time last year to 46% now.
At the same time, the S-1 notes that about 70% of revenue is attributed to a primary customer — Square.
However, the concentration risk on Square is also increasing over time — probably since Square grows faster than other customers.
We may be reading too much into it — but it was a bit surprising the S-1 was released Friday late afternoon. (In PR circles, that’s time to dump bad news then if you want to minimize uptake in the press circle).
The management team has incentive bonuses (‘tranches’) tied to achieving 1.7 to 2.5X price gains vs the opening price. (In that sense, management has a funny principal-agent problem — they want a good opening price but not too good?)
How does Marqeta compare to another payment processor — Galileo? The conclusion is that SoFi appears to have bought Galileo at a great price. Galileo has faster revenue growth (about 120%) and $200 MM in revenue. SoFi acquired Galileo for about $1.2 Bn.
Forbearance, Delinquencies and Inflated Credit Scores
As noted by the New York Fed’s Liberty Street Economics, mortgagors that took forbearance have seen an average increase of 14 points in credit score over the past year. For subprime mortgagors the increase was 57 points. This inflation of credit score may make it more difficult for lenders to evaluate the creditworthiness of borrowers.
The post also notes that the mortgage borrowers who remain in forbearance without making payments — 2.9% or total — may struggle to avoid delinquency as COVID protections end. This could raise the delinquency rate, now 0.9% significantly above the pre-pandemic level of 1.3%.
As we have previously written about, the picture looks different for the unsecured MPL segment; Prosper delinquencies for example are now below historical levels as the forbearance programs faded out, and 90% of loans that entered forbearance March through May last year are now current.
Interested in running a similar analysis using your own data? Reach out to firstname.lastname@example.org to set up a demo.
In the News
- FCA Warns UK Fintechs Against Comparing Themselves to Banks (Financial Times, 05/19/2021) FCA orders 300+ companies to notify customers about the risks of e-money accounts.
- Walmart Sees Year Of Pent-Up Demand At Stores; Says Consumers ‘Want To Get Out’ (PYMNTS.com, 05/18/2021) Physical retail is bouncing back in a post-COVID world, driving Walmart’s revenue and earnings beat.
- Charging 589% Interest in the Pandemic Is a Booming Business (Bloomberg, 05/17/2021) Government stimulus improved the consumer credit environment, leading to an increase in payday lender earnings, even as revenues declined.
- Fidelity’s Pitch to America’s Teens: No-Fee Brokerage Accounts (WSJ, 05/18/2021) Gen Z to enter the frenzy: Fidelity to allow teens access to investment accounts.
- EXCLUSIVE Goldman to Launch Marcus UK Robo-Adviser Early Next Year (Reuters, 05/17/2021) Goldman to expand its reach overseas; the UK accounts for 30% of deposits on Marcus.
- C2FO, Marcus By Goldman Sachs Team On SMB Financing (PYMNTS.com, 05/19/2021) Goldman to offer SMBs on C2FO’s platform access to up to $1MM in financing for working capital needs.
- Amount — One of the Fastest Growing FinTech Players in the US — Reaches $1B Unicorn Status (Amount, 05/18/2021) With the announcement of its nearly $100 MM Series D, the FinTech player that helps banks offer buy now, pay later services, reaches $1 Bn Unicorn status.
- Report: NerdWallet Looks to Go Public with Confidential Filing (PYMNTS.com, 05/14/2021) Personal finance company Nerdwallet has privately filed paperwork to go public, seeking a $5Bn valuation.
- Green Dot to Buy Tax Refund Unit From Republic Bank for $165MM (PaymentsSource, 05/14/2021) Green Dot to expand its footprint in the tax space with acquisition of tax refund solutions unit from Republic Bank.
- Robinhood Plans to Reveal Its IPO Filings as Soon as Next Week (Bloomberg, 05/18/2021) The popular trading app plans to reveal filings for a late June IPO.