Happy Sunday,
The Fed resumes rate hikes, but differences among policymakers emerge. Home prices climb. Senate seeks to rein in SBA’s 7(a) expansion. FDIC warns on banks undercounting uninsured deposits. Bunq raises €44.5Mn in additional funding. FedNow is live, now what? Cross River and Plaid expand partnership. Banc of California acquires PacWest. Upgrade acquires Uplift. Continued earnings season coverage.
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Fed Resumes Rate Hikes
Looks like it was a “pause.” After taking a breather last month, the Fed hiked rates another 25 bps at its meeting last week. The target Fed funds rate has now reached a 22-year high of 5.25-5.5%. While inflation has improved substantially since it peaked at an annualized 9.1% last June, some worry the easing may be temporary.
Economic activity and the job market remain robust, despite the rapid increase in interest rates. GDP in the second quarter grew faster than expected, coming in at an annualized 2.4%. The Fed’s next scheduled meeting is in September. More than a year into its hiking cycle, differences among policy makers on the FOMC are widening. Three key groups are emerging: hawks, doves, and centrists. The splintering is clouding the outlook for future rate increases and may undermine the Fed’s credibility on inflation and its communication with investors and the public.
Image: Wall Street Journal
Fed Chair Powell is trying to temper expectations about whether or not the Fed will raise again then, so that it can incorporate the latest data.
Meanwhile, despite rising rates, home prices climbed for the fourth consecutive month. Persistent demand and tight inventory have worked to push home prices up.
Senate Seeks to Rein In SBA Fintech Plan
The Small Business Administration was set to end its 40-year moratorium on adding new non-bank lenders to its flagship 7(a) lending program. But now the Democratically-controlled Senate is set to throw a wrench in the works. The Senate Small Business and Entrepreneurship Committee passed a bill with 18-1 bipartisan support that would limit the number of new non-bank lenders in the 7(a) program and require greater oversight of such lenders.
The measure comes in response to concerns from some lawmakers and bank trade groups that admitting non-bank fintech lenders to the program could weaken the program’s guardrails. The SBA defended its decision to expand access to the lending program.
FDIC Warns Banks on Undercounting Uninsured Deposits
The FDIC issued a statement warning banks about non-compliance with guidelines detailing how they calculate uninsured deposits. The statement, posted to the FDIC’s website last week, said that some banks are “not reporting estimated uninsured deposits in accordance with the instructions.” The FDIC clarified the statement does not apply to institutions with less than $1Bn in assets that do not report estimated uninsured deposits.
The FDIC statement comes amid the process to determine who will foot the bill for the costs of invoking the “systemic risk” exception to cover uninsured deposits of SVB and Signature Bank, which failed earlier this year. The special assessment will be determined based on the amount of banks’ uninsured deposits as of the end of 2022, giving impacted banks an incentive to reduce the amount of their reported uninsured deposits.
Bunq Raises €44.5Mn In New Funding
Dutch neobank bunq announced it has raised an incremental €44.5Mn (USD $49Mn), bringing its total new funding this year to €100Mn. The fundraise values the company at €1.65Bn, which is the same as its 2021 Series A round. bunq, which is a fully licensed bank in the Netherlands, is seeking to expand to the U.S. The company has filed an application for a bank charter and deposit insurance. However, with the fallout of this spring’s bank failures still reverberating and other de novo neobanks struggling to find sustainable business models, the likelihood of bunq’s application being approved seems slim at best.
FedNow Is Live. What’s Next?
Finally, a new payment network! After years of build up, the launch of FedNow feels somewhat anticlimactic. FedNow, arguably the most significant new payment network since the launch of ACH in the 1970s, went live with 35 banks and 16 service providers. The service operates 24/7/365 and enables real-time payments and settlement. During the rollout period, transactions will be capped at $500,000.
Still, believe it or not, real-time payments in the U.S. aren’t actually new. The Clearing House’s RTP has been live since 2017. Some six years later, TCH RTP still only reaches some 65% of deposit accounts. Visa Direct launched in 2017 as well and currently reaches approximately seven billion endpoints, including cards, accounts, and digital wallets. How consumers experience FedNow will depend on how banks “productize” the offering, including pricing, and the types of use cases it makes sense for.
Cross River and Plaid Expand Partnership
Cross River and Plaid announced an expansion of their partnership to deliver multi-rail payment solutions to U.S. businesses and their customers. Cross River will act as the first financial institution to support Plaid’s real-time solutions such as Instant Payouts on Plaid Transfer. Instant Payouts enables real-time distributions for investing, lending, insurance, payroll and more, via a single API.
Banc of California to Acquire Troubled PacWest
In a sign that the regional bank tumult is not yet over, Banc of California is buying its larger rival PacWest. The all-stock transaction is valued at about $1Bn. Centerbridge Partners and Warburg Pincus are investing a combined $400Mn for a 20% stake in the combined company. Existing PacWest shareholders will receive 0.66 shares of Banc of California stock for each share they hold. The combined bank will have about $36Bn in assets, which is less than PacWest alone held before trouble hit the regional bank sector beginning in March. The banks will sell down assets in order to repay some of the $13Bn in wholesale borrowings they hold.
Upgrade Acquires Uplift For $100Mn
Consolidation continues in the consumer fintech space. Personal lender Upgrade is acquiring BNPL provider Uplift for $100Mn in cash and stock. Uplift was last valued at a reported $195Mn when it raised a $123Mn Series C back in 2019. While Upgrade already offers a BNPL-style financing product, acquiring Uplift helps Upgrade break into a new segment: travel. Uplift has a network of some 300 airline, cruise, and hotel partners.
Earnings Season: Fintech Lending, Consumer Spending
Source: PeerIQ
Fintech lenders began to report earnings this week, and consumer originations came in stronger than the first quarter for Enova – Consumer +38%, OneMain – Personal Loans +33% and FinWise +27%. Enova CEO David Fisher explained the growth, stating “Strong demand, especially on the consumer side of our business combined with continued solid credit performance, enabled us to be more aggressive with originations.” While Enova grew its consumer originations sequentially, its small business originations fell (8)%. OneMain did not have to reach down the credit stack to increase originations, with Doug Shulman explaining that, “We’ve seen notable increases in the credit quality of our originations. 64% of new customer originations since our major credit tightening in August of 2022 have been in our top two risk rates.”
LendingClub’s originations fell (12)% QoQ (in line with guidance), as the fintech focused on retaining fewer originations. LendingClub was successful in lowering retained originations to 33%, from 44% a quarter prior. Looking ahead, LendingClub expects a further slowdown in originations, projecting $1.4-1.7Bn for Q3, significantly below the $2.0Bn in Q2. The company also announced that it would be launching a new revolving platform in Q3. The platform’s first product will be an installment line of credit “for existing customers who build back up credit card balances or for whom we didn’t pay off all their credit card balance in the first-go.”
LendingTree noted that loan close rates declined, particularly in the prime and mid-prime segments, as its lending partners have continued to tighten underwriting criteria and high rates have put pressure on consumer demand.
Student lender Navient originated $197Mn in private education loans during the quarter, down from $420Mn a year prior but up from $168Mn a quarter prior.
Turning to credit, we saw NCOs decline for many, with FinWise (110)bps, Enova (60)bps Navient (24)bps, and OneMain (12)bps reporting sequential improvements. In contrast, LendingClub reported a +60bps increase in NCOs, but CFO Drew LaBenne explained, “Part of what we’re seeing right now with charge offs increasing, it’s just the average age of the portfolio increasing as, one, as the ’21 and ’22 vintages are obviously aging, but on top of that, as we’re slowing down originations in the ’23 vintage, the average age of that portfolio is going to get even older in subsequent quarters. So, would expect that charge off rate to keep going up.” Enova’s consumer NCOs fell by (250)bps, but its small business NCOs rose +50bps sequentially.
Looking at deposits, LendingClub reported a (5)% decline from Q1 deposit balances, breaking a streak of multiple quarters of deposit growth. However, FinWise reported a +17% increase in deposits sequentially, attributing the growth to an increase in brokered CDs which were primarily utilized for short term funding needs. With rising interest rates, FinWise saw its cost of deposits rise to 4.02%, from 3.18% in the first quarter.
Wrapping things up, consumers continued to open up their wallets, with Mastercard GDV up +10% YoY and Visa payments volume up +8% YoY. In particular, dining and travel segments reported strong consumer spending.
In the News:
Bankers question regulatory crackdown on NSF fees (American Banker, 7/24/2023) Bankers are pushing back on regulators’ crackdown on charging NSF fees for representment transactions.
Treasury set to shelve BNPL regulations (Finextra, 7/24/2023) U.K. regulators look set to take a lighter touch to regulating popular buy now, pay later services.
OpenAI’s Sam Altman launches Worldcoin crypto project (Reuters, 7/24/2023) Sam Altman’s Worldcoin and associated World ID offering go live – but not without controversy.
Personal Loan Interest Rates Continue To Drop (Fox Business, 7/24/2023) According to personal loan marketplace Credible, rates for personal loans have declined.
Flashing yellow: Rate hikes exacting a toll on banks’ credit quality (American Banker, 7/19/2023) The rapid rise in interest rates is beginning to cause stress for a subset of borrowers.
Deposit ‘marketplace’ launches with backing from BMO (American Banker, 7/25/2023) Grounded Technologies announced the launch of its deposit, loan, and CRA “marketplace.”
Lighter Fare:
‘Barbie’ Box Office to the World: The Pandemic Is Officially Over (NYTimes, 7/23/2023) Barbie and Oppenheimer’s blockbuster performance show moviegoers are hungry for something new at the box office.