Greetings,
The job market remains tight, but consumer confidence has been dented. The CFPB is warning of “robo discrimination.” Jelena McWilliams’ crypto comments. Overdrafts are out, financial health is in. Cross River and PayTile partner on payments platform. Revolut advances U.S. strategy. Percent launches private credit underwriting platform. Experian to launch BNPL bureau. Monzo finally launches in the US.
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Consumer Sentiment Hit by Omicron, Inflation
The US job market remains tight, although there are some signs demand for workers has cooled amidst the Omicron surge. Meanwhile, consumer confidence has taken a hit from continued inflation. In a December survey, nearly 60% of consumers said it was a bad time to make a major household purchase, citing uncertainty and a lack of affordability.
CFPB Warns on AI Underwriting
CFPB Director Rohit Chopra has put lenders on notice about use of AI in credit underwriting. Chopra has taken a hawkish stance on policing use of the tech, arguing that such algorithms can never “be free of bias” that can result in unfair outcomes for consumers. The comments from Chopra and other CFPB officials suggest that enforcement actions targeting how lenders use alternative data and AI in underwriting are likely forthcoming.
McWilliams Exits FDIC with Digital Assets Message
Prior to stepping down as FDIC chair Friday, Jelena McWilliams participated in a discussion on the accomplishments of the FDIC during her tenure and the future of banking. McWilliams stressed that going forward, regulators need to be open to the potential innovation of crypto, and to be careful not to stifle progress. Additionally, she highlighted the potential opportunities for digital assets to improve payment systems, compliance and loan opportunities. Further, she voiced support for stablecoin insurance and her view that bank-issued stablecoins closely resemble digital representation of deposits.
Major Banks Continue to Cut Overdrafts as Regulators Focus on Financial Health
Over overdrafts. The trend of establishment banks paring back service fees shows no signs of slowing down. In just the last few weeks, First Citizens has reduced its overdraft fee to $10 and eliminated NSF fees.
TD will no longer assess fees on overdrafts of $50 or less. The bank will also give customers a 24 hour grace period to bring their balance within that threshold before they’re charged a fee.
A confluence of factors has driven banks to make changes to overdraft policies that have driven billions in fee revenue, particularly since use of debit cards became commonplace in the ‘90s. The pandemic exposed the financial fragility of many American households. Research and attention from regulators and legislators has intensified, particularly on the disproportionate share of fees paid by lower income consumers. And establishment banks have faced an onslaught of new competition from fintechs offering cheaper or no-fee alternatives.
Cross River and PayTile Partner on Payments Platform
Cross River to power PayTile’s P2P payments app that uses geo-location technology to enable users to send money to those nearby. The product provides a more seamless P2P payment experience, bypassing the need to exchange any information between parties, such as email, phone number or username. Some have likened it to the iPhone’s AirDrop feature.
Businesses can look forward to PayTile’s Money Drop feature, which will allow users to digitally place cash, coupons, or discounted goods at physical locations for redemption. In practice, a retail store could offer coupons that can be redeemed at the store location, or a concert venue could offer discounted tickets for those that buy from the app at the venue.
Revolut Advances U.S. Remittance Strategy
London-based Revolut is pushing forward in the U.S. Last week, the neobank announced an expansion of its no-cost remittances from the U.S. to Mexico. The company will now enable users to send up to $1,000 per month in as little as thirty minutes with no fees. Those sending more than $1,000 will be charged 0.5% or need to upgrade to a paid tier. The thirty minute claim would make Revolut among the fastest remittance services for sending funds from the U.S. to Mexico.
The remittance strategy is designed to appeal to potential customers on both sides of the border. Revolut is gearing up to launch in Mexico. Presumably once live in the country, Revolut will be able to offer improved service for Revolut-to-Revolut transfers, providing it a potential customer acquisition vector in both countries.
Percent Launches Private Credit Underwriting Platform
Startup Percent has announced the launch of its Percent Underwriter platform. The platform is designed to help anyone underwrite in the private credit space. Nelson Chu, founder and CEO of Percent, highlighted the general lack of transparency, governance, and consistency as barriers to expanded access to private credit markets. These barriers have meant that, historically, underwriters focus on larger deals that come with larger fees. Percent’s underwriting platform aims to solve these pain points, making smaller deals economically viable.
The bespoke nature of debt offerings has made them more resistant to the kind of automation and scale common in other areas of financial services. But the increased sophistication of software platforms continues to change that. The upshot? Smaller deals become more viable, increasing access and inclusion.
Experian to Launch BNPL Bureau
Experian is joining Equifax as the second major credit bureau to announce a plan for incorporating data on buy now, pay later financing.
Equifax’s announcement strongly suggests that it will include BNPL tradeline data in its existing infrastructure and consumer reports. When it announced its plans, Equifax even touted the potential to improve users’ credit scores. Equifax’s analysis suggested users with limited credit history could see a boost of up to 21 points from including BNPL data, while typical borrowers could see their scores rise by up to 13 points.
Experian, however, appears to be taking a different approach. It announced plans to launch a specialty bureau to track data on consumers’ use of buy now pay later products. Experian positioned the approach as fostering financial inclusion and helping providers better assess risk, while protecting consumers from potential negative impacts to their credit scores.
UK Challenger Monzo Launches in the U.S.
At long last, Monzo has publicly launched in the U.S. The British neobank has been in an extended 18 month “beta” in the U.S. During that time, it applied for a national bank charter, but withdrew the application when it became clear it wouldn’t be approved. Instead, its U.S. offering is built via a partnership with Sutton Bank.
Monzo enters an incredibly crowded U.S. challenger banking market that is already seeing early signs of consolidation. It is competing with fellow import Revolut, as well as well-funded native challengers like Chime, Varo, and Current. Not to mention ONE, which was recently acquired as part of Walmart’s fintech push. N26 exited the U.S. market after failing to gain meaningful traction.
Monzo has seen its fortunes rebound recently, as its valuation rose in its latest fundraising round. But its troubles aren’t entirely behind it. It faces regulatory scrutiny in its home UK market over potential compliance lapses. Its attempt to crack the U.S. market may yet turn out to be an expensive distraction.
Solid Origination Growth and PayPal’s Problems: This Week in Earnings
This week, OneMain and Enova posted double-digit origination growth on a year-over-year basis, leading them to outperform the broader market. OneMain ended down (0.7)%, on a trading day where the Nasdaq was down (3.7)%, and Enova jumped 6.3%. PayPal’s stock got crushed on earnings, plummeting (24.6)% due to illegitimate accounts, softer consumer spending, and inflationary pressures caused by supply chain issues.
Source: PeerIQ
PayPal missed its 4Q guidance of 12.9Mn net new active users, with 4.5Mn accounts disqualified or excluded as they were identified as illegitimate. Many of the accounts had been created by bot farms to take advantage of PayPal’s $5-10 incentives it offered for signing up for PayPal or Venmo. With the rise of fintechs during the pandemic, these companies have become targets and have faced increasing fraud issues. Some merchants have even stepped in to ban fintech cards.
PayPal noted that e-commerce growth missed Q4 expectations due to supply chain issues. Additionally, consumer spending, while strong in the first couple months of the quarter, slowed in December amidst an Omicron surge and inflationary pressures combined with the waning impact of stimulus measures. The slowdown in spending was primarily seen in the lower income consumer segment.
Looking ahead, PayPal plans to rollout pay with Venmo functionality for Amazon, Starbucks, and DoorDash this year. Management indicated that they plan to focus on growing their BNPL capabilities, in particular, internationally. And, through a partnership with Synchrony, they will continue to ramp up the high-yield savings product during the first half of the year.
OneMain reported a successful rollout of its new Brightway credit cards, surpassing its 60k account target, with 66k issued by year end. Brightway credit cards represent a large opportunity for the company, with CEO Doug Shulman reminding analysts that, “the total addressable market for nonprime credit cards is $420 billion, 5x the size of the installment loan market. So we anticipate this to be a source of growth for us.”
OneMain’s originations grew nearly 20% from the prior year, “driven by strong demand for our core personal loan products and bolstered by growth from our new products.” However, sequentially, originations were down slightly ((0.9)%).
Enova experienced tremendous origination growth, up nearly 100% from the prior year and 25% from the third quarter. Fourth quarter demand was attributed primarily to its near prime consumer and SMB businesses. CEO David Fisher reported that, “origination from new customers were 46% of total origination, the highest since our first year of business and up from 43% in Q3 and 28% in Q4 of last year.”
Source: PeerIQ
Origination growth has continued into the new year, with management indicating that the company saw a stronger January (typically a slower month) than anticipated.
While charge-offs have trended slightly higher to 6.7% for the quarter, compared to 4.2% in Q3, they remain significantly lower than historic levels (15.6% 4Q19 pre-pandemic rate). Management noted that credit quality remained solid across all products, including recent vintages.
In The News:
U.S. Senate Slates Hearing on Stablecoins for February 15 (The Block, 1/31/2022) The hearing is scheduled one week after the House Financial Services Committee’s own hearing on stablecoins.
Why U.S. Chamber of Commerce is Concerned About Biden’s Banking Nominees (American Banker, 1/30/2022) The Chamber sent a letter to the Senate Banking Committee asking them to question Sarah Bloom Raskin on particular issues including climate-sensitive bank regulation.
Small Banks Set to Go Live with Bitcoin Trading (American Banker, 1/18/2022) NYDIG will help ~300 community banks allow customers to buy and sell bitcoin in the first half of 2022.
Credit Unions Hedge Bets as Auto Industry Rebounds (American Banker, 1/28/2022) Credit unions must compete to win potential customers with both large banks and online dealers like Carvana and CarMax.
Here’s What the Bank that Bought Assets from Zuckerberg’s Crypto Project Plans to Do With Them (CNBC, 1/31/2022) Silvergate Capital intends to launch a stablecoin by the end of 2022.
Square Afterpay Acquisition Closes, Sellers Can Now Offer BNPL (PYMNTS, 1/31/2022) The BNPL product will be available as of February 1st for Square users, and sellers will be able to access Afterpay for no extra cost until May 10th.
Fintechs Merge to Combine Consumer, Business Loan Tech for Banks (American Banker, 2/1/2022) Amount, a spinoff of fintech lender Avant, acquired Linear Financial Technologies for $175Mn.
FinTech Upgrade Launches Product to Help Shoppers Reduce Inflation’s Sting (PYMNTS, 2/2/2022) Upgrade Shopping provides cashback at over 20,000 local and national merchants.
Lighter Fare:
Scientists Were Able to Regrow Frog Legs. Will it Pave the Way for Regeneration in People? (USA Today, 1/30/2022) Frogs cannot naturally regrow limbs like salamanders, lizards and crabs can, but with an experimental drug cocktail, some frogs were able to.