Greetings,
Yes, inflation is up again. CFPB sues TransUnion. Circle raises another $400Mn. Former Apple Card designer launches neobank for ‘solopreneurs.’ Investors turn cautious on consumer debt. Cross River and GreenBox partner. Mastercard presses forward with AI, open banking, crypto. Banks kick off earnings season.
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With Inflation Worsening, Expect More Aggressive Rate Hikes
Hot off the presses, the CPI numbers are in, and they’re not great. Driven by continued fuel and rent prices, inflation hit 8.5% in March, a four-decade high. Economists are now expecting the Fed to hike rates by half a point in both May and June. They now put the odds of a 2023 recession at 40%.
Meanwhile, while the changing rate picture should benefit banks in the long run, in the short run, it is driving turmoil in the bond markets. The value of banks’ bond portfolios has cratered amid high inflation and rising rates.
Image: American Banker
CFPB Sues TransUnion for Violating 2017 Consent Order
The CFPB announced it would sue TransUnion for violating a 2017 consent order last week. In a rare move, the bureau also individually named a former TransUnion exec, John Danaher, in the suit.
The suit alleges TransUnion used deceptive “digital dark patterns” to trick users into signing up for subscription credit monitoring products. It also alleges violations of the EFTA, arguing TransUnion didn’t have proper authorization from customers before charging them for recurring payments.
Danaher, who recently retired from his executive role at subsidiary TransUnion Interactive, allegedly instructed staff not to implement an opt-in selection box for the credit monitoring product, as required by the 2017 consent order.
In a statement about the suit, Chopra highlighted three key points: the CFPB’s willingness to hold individuals accountable for wrongdoing, the use of “dark patterns” to steer customer behavior, and holding “repeat offenders” accountable.
USDC-issuer Circle Raises $400Mn as Hsu Argues for Bank-like Regulation
Circle, the crypto firm behind the USDC stablecoin, has raised a fresh $400Mn in funding. The latest round comes after $440Mn raised just last May. Investors in the new round notably include Blackrock, which, according to the press release, “has entered into a broader strategic partnership with Circle, which includes exploring capital market applications for USDC.”
Meanwhile, the OCC’s acting Comptroller, Michael Hsu, is pushing back on the notion that stablecoins could be regulated similarly to money market funds. Instead, he continues to push for “bank-like” regulation of stablecoin issuers. Hsu acknowledges a narrower set of regulatory and supervisory requirements could be sufficient, if an entity were limited to issuing stablecoins and holding reserves to meet redemptions.
Former Apple Card Designer Launches Neobank for Solopreneurs
A former UX designer for the Apple Card just raised $5.3Mn to build his own neobank. Daniel Sathyanesan hopes to solve banking challenges for a specific but growing niche: the solo digital entrepreneur. Sathyanesan points to challenges like unpredictable cash flow, revenue that’s taxed as personal income, and difficulty of accessing capital. While there are neobanks focused on freelancers and gig workers, no one is meeting the unique needs of the digital ‘solopreneurs,’ he argues.
The round has some big names attached to, including Accel, Sheel Mohnot, of Better Tomorrow Ventures, Ramp co-founder Karim Atiyeh, Pipe co-founder Harry Hurst, and others.
Still, the neobank space has become extremely crowded and those making their way onto public markets (Dave, MoneyLion) have performed poorly.
Investors Turn Cautious on Consumer Debt
Buyers of bonds backed by consumer debt are growing more cautious. Investors fear that continued inflation and slowing growth may push some borrowers, particularly lower-income and subprime consumers, to fall behind.
That caution is showing up in higher spreads over interest rate benchmarks and battered share prices for some fintech lenders like Affirm and Upstart. While bonds have broadly sold off, driving yields higher, consumer-debt backed bonds have seen their yields rise even more quickly.
Image: Wall Street Journal
Cross River and GreenBox Make Crypto Payments Compelling
GreenBox, a cryptocurrency point-of-sale solution, has entered into a partnership with Cross River to help facilitate merchants’ acceptance of cryptocurrencies as payment. By partnering with Cross River, GreenBox gains access to multiple ways to move value, including real-time payments, push-to-card, and ACH. GreenBox aims to leverage the capabilities Cross River provides to expand into serving larger merchants and business-to-business transactions.
Mastercard Continues AI, Open Banking, Crypto Initiatives
Mastercard, which acquired open banking platform Finicity, is developing AI-based solutions to help improve the performance of account-to-account transfers. Because of the latency of ACH transactions, as many as 1 in 50 transactions fail. By leveraging open banking data via Fincity, Mastercard has created what it has dubbed a Payment Success Indicator, which seeks to predict the likelihood a payment will be processed correctly. Merchants, banks, and digital wallets can use the indicator to assess the risk associated with transactions.
The payment network’s latest initiative on the crypto side sees it teaming up with crypto lender Nexo. The two are partnering on what Nexo claims is the world’s first “crypto-backed” payment card. Essentially, the product is a credit card, where the borrower’s credit line is collateralized by cryptocurrency. According to Nexo, users will be able to spend up to 90% of the fiat value of their crypto holdings.
Banks Face Tough Year-over-Year Comps as Earnings Season Begins
We kick off earnings season with coverage of large banks, which faced tough YoY comps after a particularly profitable 1Q21 driven by trading revenues. Across the board, banks had lower profits on a YoY basis, sending shares lower on the day (Ally (5.2)%, Wells Fargo (4.5)%, JPMorgan (3.2)%, PNC (1.8)%, Goldman Sachs (0.2)%). Citi was the only company we covered that ended in the green, +1.5%, after beating earnings expectations on better than expected trading revenues.
Source: PeerIQ
As we have all seen, installment loans have taken off since the start of the pandemic, with fintechs dominating the news cycle. However, banks have also gotten involved in offering the lending product to consumers.
While not yet a large part of their total loan books, both Citi and Goldman Sachs have shown considerable growth in their installment loan books over the past year. Citi saw its installment loans grow to $3Bn, a 75% YoY and 13% QoQ increase. Goldman Sachs reported $4Bn in installment loans for the quarter, after reporting $3Bn one year ago.
Large banks like Citi and Goldman Sachs likely hope to leverage their existing customer base and name recognition to take market share from fast growing fintech installment lenders. We expect to keep an eye on the dynamic between these groups as the red-hot loan product continues to gain popularity.
Source: Citi Earnings Presentation
Source: Goldman Sachs Earnings Presentation
Even with high inflation, consumers managed to put away cash, with average deposits mostly up from the fourth quarter (Citi +4%, JPMorgan +4%, Wells Fargo +2%, Ally +2%, PNC +0%).
Despite increasing interest rates Ally was able to increase its auto originations 6% sequentially. On the other hand, JPMorgan (1)% and Wells Fargo (22)% saw declines in auto originations as “a lack of vehicle supply continued to affect origination volume”.
Rising interest rates also put a damper on home sales and refinancings, sending home lending originations down big from the fourth quarter for Citi (9)%, Wells Fargo (21)%, JPMorgan (41)% and Ally (41)%.
In the News:
Crypto Industry Helps Write, and Pass, Its Own Agenda in State Capitols (New York Times, 4/10/2022) Crypto lobbyists and execs are going state-by-state to get laws enacted.
Wagestream Nabs $175m to Scale Support for Frontline Workers (Altfi, 4/13/2022) Smash Capital led the Series C round, with proceeds to go towards expanding services for underserved and financially stressed workers.
Justin Bieber, Gwyneth Paltrow and Ashton Kutcher are Among Dozens of Celebrity Investors Piling into Crypto Startup MoonPay (CNBC, 4/13/2022) MoonPat lets users buy crypto using credit cards, bank transfers and mobile wallets such as Apple Pay and Google Pay.
‘Breakout’: Apple’s Plan To Pump Up Apple Card And Apple Pay And Win The Payments War (Forbes, 4/10/2022) Apple’s plan to compete with commerce platforms like Square, PayPal, Google and Klarna.
BNPL Effects on Financially Vulnerable Coming into Focus (Lendit Fintech News, 4/8/2022) While BNPL users are more likely to have lower credit scores, only 11% used plans that charged interest.
TD Bank, U.S. Bank Putting Car Payments in the Fast Lane (American Banker, 4/10/2022) Banks are pushing for greater adoption of real-time payments, which could be a benefit for consumers who wish to sell their vehicles.
Fintech Brex Bets Big on Software, Lands DoorDash as a Customer (Tech Crunch, 4/13/2022) Brex pushes into financial software with the release of a new spend management product called Brex Empower.
Lighter Fare:
Declassified Government Data Reveal an Interstellar Object Exploded in The Sky in 2014 (Science Alert, 4/12/2022) The object was confirmed to be the first interstellar object ever detected in our solar system.