Greetings,
Fed pivots as consumer spending grows. FDIC power struggle spills into public view. CFPB opens inquiry into BNPL. Crypto companies make fundraising hauls. BNPL grab bag. Cross River, Astra team up to offer card-to-card instant payment API. Chime partners with Walgreens for free cash deposits. Blue Apron and Aspiration team up on co-brand card. MoneyLion acquires Even Financial.
A quick programming note – this newsletter will be taking next Sunday, the 26th, off. Happy holidays from the entire PeerIQ and Cross River family! We’ll be back on January 2, 2022.
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Fed Readies for Rate Raises in 2022; Retail Spending Bump
Just don’t say “transitory.” With the pandemic dragging on, inflationary pressures have remained stronger for longer than forecasters expected. CPI in November increased by 6.8% vs. the year prior, the fastest pace since 1982. Now, the Fed is pivoting. It has accelerated winding down its bond buying program. This paves the way for as many as three interest rate hikes in 2022.
At least consumers are opening their wallets. Retail spending in November rose 0.3% from the month prior and rebounded 18.2% from November 2020. Debit and credit card spend data from major banks reflect the trend. At Bank of America, debit and credit spend rose 20% and 28% in November, respectively, vs. the year prior.
FDIC Power Struggle Spills Into Public View
You’re probably already familiar with the outlines of this story. Dueling statements were released – one on the CFPB’s website and one on the FDIC’s – concerning a request for public comment regarding regulations tied to the Bank Merger Act. Republican-appointed FDIC Chair Jelena McWilliams has blocked the Democratic appointed board members Rohit Chopra and Martin Gruenberg from publishing an RFI outside the FDIC’s normal protocols. The RFI proposed by Director Chopra and Martin Gruenberg seeks to review the effectiveness of the existing regulatory framework for meeting the requirements of the Bank Merger Act.
The RFI and accompanying statement make two key arguments justifying increased scrutiny of bank mergers. First, that continued concentration in the banking sector increases systemic risk. And second, that mergers lead to branch closures and may potentially negatively impact access to financial services and credit, especially for workers, farmers, small business, startups, and consumers.
Systemic risks are already well-addressed through a variety of mechanisms, including stress testing, capital ratio requirements, and liquidity coverage rules. Regulators have further options, in that they can designate specific institutions as “systemically important,” triggering additional requirements.
The branch argument is a bit misleading, if not an anachronism. While bank consolidation began in earnest in 1985, the number of bank branches continued rising, not peaking until 2012, at nearly 83,000 branches. The decline in bank branches since then owes more to the rise of digital banking channels than it does to bank mergers. And as Chime’s recent partnership with Walgreens demonstrates (see below), the private market is continuing to iterate to develop new, efficient solutions to meet consumers’ banking needs, both online and in-person.
CFPB Opens Inquiry Into BNPL
Following the insistence of six Senate Democrats, the CFPB announced it would be opening an inquiry into BNPL products. The inquiry includes ordering Affirm, Afterpay, Klarna, PayPal and Zip to “submit information so that we can report to the public about industry practices and risks.”
Senators were concerned with the lack of consumer protections, as BNPL providers, offering extensions of credit to be paid back in four payments or less, do not necessarily have the same degree of regulatory scrutiny as other lending products.. The CFPB signaled that it would focus on consumer debt accumulation, data harvesting, and what consumer protection laws may apply.
The new inquiry, coupled with skepticism of the BNPL industry’s growth during November’s HFSC meeting, make clear that regulators are looking to set clearer guidelines for the space. We would expect greater scrutiny of the space going forwards.
Institutionally-Focused Crypto Companies Make Big Fundraising Hauls
Two crypto startups that are focused on serving the institutional (read: establishment) sector have announced huge fundraising rounds.
NYDIG announced it has raised $1Bn, believed to be the largest crypto fundraising round ever. The investment values the company at $7Bn. NYDIG has been likened to the “AWS for crypto.” It is focused on building trading and custody infrastructure that enables other players to develop crypto offerings.
Meanwhile, Anchorage, which focuses on providing crypto custody services to banks and corporations, has raised a $350Mn round, which values the company at just over $3Bn. Anchorage CEO Diogo Monica is betting that established banks will increasingly look to offer their clients and customers exposure to crypto.
While “defi” may be the trending topic du jour, investors seem to be placing big bets on crypto companies focused on serving the centralized client of yore: banks and corporations.
BNPL Grab Bag: Citizens & Microsoft, Afterpay Expands Offerings, Klarna’s A2A Push
Citizens Bank has extended its partnership with Microsoft. Shoppers at the Microsoft Store will now have the option to choose no-interest financing on purchases like Xboxes, laptops, and tablets. It’s one of several initiatives Microsoft has made recently to embed financing options into its ecosystem, including building Zip’s split-pay offering directly in its Edge web browser.
But BNPL providers aren’t taking the threats from banks like Citizens encroaching on their turf lying down. For example, Afterpay, which is in the process of being acquired by Block, has aggressively rolled out new features and functionality designed to expand its relationships with consumers and merchants. In recent months, it has added sales and marketing analytics for merchants, the ability to run ads in its Afterpay app, split-pay support for recurring subscriptions, and a rewards pact with conglomerate Rakuten.
Source: American Banker
Klarna similarly has been branching out, making a slew of acquisitions to expand its product suite. It’s also looking to reduce its dependence on card networks like Visa and Mastercard for repayment. Last week, it announced a partnership with GoCardless in the U.S. to enable users to make payments on split-pay or longer-term financing directly from their bank account rather than via linked debit or credit card. Such “account-to-account” payments lower Klarna’s payment processing costs and dovetail with its recently launched “Klarna Pay” button. The card networks are the ones that stand to lose if these payment methods gain significant traction.
Cross River, Astra Team Up to Offer Card-to-Card Instant Payment API
The new solution eliminates the need for settlement accounts or developing reconciliation operations, allowing developers to automatically process debit card-to-card transactions. Astra chose to partner with Cross River, citing its critical infrastructure and depth of experience in the space. Gil Akos, CEO of Astra, Inc, stated, “Never before have developers been able to leverage card payment rails like Visa to instantly transfer cash between debit cards.” The API makes it easy for fintechs to embed these types of transfers without the need for additional infrastructure.
Chime Partners with Walgreens For Free Cash Deposits
Something like 12Mn users have flocked to neobank Chime for its no-fee value proposition and to enjoy features like fee-free overdraft. And while digital-only banks have a lot going for them, a physical footprint is, by definition, not one of their selling points. To provide access to cash, most neobanks partner with popular ATM networks like Allpoint or Moneypass. These ATMs allow users to withdraw cash, but, in most cases, users aren’t able to deposit cash.
The solution to that problem to date has been cash load networks like Green Dot. Users could “deposit” cash through Green Dot’s network of merchants. The fee to do so is typically $5-6, which is high, on a percent basis, for what are typically relatively small cash deposits.
Chime’s partnership with Walgreens solves this pain point. Chime users can now make cash deposits at over 8,500 Walgreens locations for no fee. Although cash usage continues to decline, it’s unlikely to disappear any time soon. As cash usage decreases, the per user and per transaction cost to maintain infrastructure to support physical currency – like bank branches and ATMs – increases. Chime’s deal with Walgreens is a smart partnership to leverage existing infrastructure to meet consumers where they are and provides a preview of what in-person “banking” could look like in the future.
Blue Apron and Aspiration Team Up on Co-Brand Card
In one of the stranger co-brand tie ups we’ve seen, meal kit service Blue Apron announced it is teaming up with environmentally friendly banking startup Aspiration. The Blue Apron Aspiration Zero Card will earn users rewards for their Blue Apron purchases, let users offset their carbon footprint, and Aspiration will plant a tree for each qualifying purchase.
While co-brand deals have long been common in the credit card space, we’re not aware of other fintech startups that have done co-brand deals. The combination here is also a curious one. While both brands may skew younger and higher income, do Aspiration users have a particular affinity for meal kits (or, do meal kit users have a strong affinity for the environment)? With only around 400,000 subscribers, Blue Apron doesn’t represent a huge opportunity for Aspiration.
MoneyLion Acquiring Even Financial
Neobank and cash advance app MoneyLion announced it is acquiring Even Financial, an embedded finance platform, in a deal worth up to $440Mn. While the deal may be worth up to $440Mn, we may see the actual purchase price at a considerably lower amount. The deal consists of a $360Mn upfront payment which consists of $15Mn cash and $345Mn in preferred shares that are convertible to 34.5Mn common shares at $10 per share. Additionally, there is a potential earn out of up to $80Mn, payable in 8Mn preferred shares valued at $10 per share. The caveat is that MoneyLion’s SPAC is trading around $3.60 as of Friday morning, a significant discount to the $10 assumed in the deal.
MoneyLion already leverages affiliate partners as an avenue for monetizing its user base. Its acquisition of Even Financial, a CreditKarma-like financial marketplace, should bolster its ability to offer other companies’ products while enabling it to retain more of the revenue from making these referrals. Conversely, there may also be opportunities to drive Even users to the MoneyLion app, serving as a no-cost source of customer acquisition.
In The News:
How Do You Feel About Inflation? The Answer Will Help Determine Its Longevity (Wall Street Journal, 12/12/2021) In November, 7% of those surveyed said that inflation was the country’s biggest problem, tied for the highest % since 1986.
Finance Management Platform Rho Raises $75m in Series B Round (Fintech Futures, 12/13/2021) Dragoneer investment group led the funding round for the corporate spend management platform.
Mesh Payments Racks Up $50M to Help Corporate Users Manage Spend and Payments (Tech Crunch, 12/14/2021) Tiger Global led the Series B round into the expense management platform.
Visa Makes Latest Foray into Fintech with Belvo Investment (altfi, 12/13/2021) Visa participates in LatAm open finance API platform Belvo’s Series A funding round.
JPMorgan on Hiring Spree as it Targets Pan-European Consumer Bank (Reuters, 12/14/2021) The British branch of Chase is planning to hire hundreds more staff to help roll out its investment, savings and consumer lending products.
The Top 5 Trends In Fintech And Banking For 2022 (Forbes, 12/13/2021) The overhaul of overdraft fees, cryptofication of banks, faster payments, embedded finance, and open banking battle will shape the next year.
How U.S.-Russia Tensions Could Hurt Visa, Mastercard (American Banker, 12/10/2021) The retaliation from potential sanctions on Russia could hurt Mastercard and Visa’s Russian operations, where they combine for 72% of the card spend market.
Germany’s Trillion-Euro Savings Banks Mull Crypto Wallet (Reuters, 12/13/2021) The potential move would mark a radical shift for the banks, though there is huge interest for crypto among a backdrop of high inflation and negative interest rates.
Lighter Fare:
James Webb Telescope Lifted Atop its Launch Rocket (BBC, 12/14/2021) Keep an eye out this week, as this $10Bn giant will be launched to try and spot the first stars in the Universe over 13.5 billion years ago.