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Fintech Deals Still Getting Done; Student Loan Forgiveness Delayed; FTX Drama Continues

By Cole Gottlieb

November 27, 2022

Happy Sunday,

We hope you had an enjoyable long Thanksgiving weekend!

Global economy slowing but may avoid recession. Investors put the brakes on home purchases. Demand for new credit cards increases. Student debt forgiveness faces legal setbacks. Despite challenging VC climate, deals are getting done. FTX drama continues.

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Global Economy Slowing, But Hope Remains of Avoiding Recession

Despite a generally gloomy outlook for the global economy, economists don't expect the economy to slide into a recession. At the global level, a recession is usually defined as the rate of annual output growth falling below the rate of population growth, which is currently 0.9%. Forecasters see global output rising by 2% next year.

The sharp rise in interest rates isn’t only impacting traditional homebuyers. It’s also discouraging investors, which have become a major force in the single-family home market in recent years. Now, investor home purchases have dropped by 30%, a sign that they’re not immune from the forces impacting traditional buyers.

Image: Wall Street Journal

The drop is the steepest decline since the subprime crisis, aside from a from the pandemic-impacted second quarter of 2020. Still, some institutional investors are preparing funds to snap up more inventory. For instance, JPMorgan Chase’s asset management business has formed a JV with landlord Haven Realty Capital to purchase and develop $1Bn worth of homes.

Demand for New Credit Cards Bright Spot for Issuers

According to the latest survey data from the NY Fed, 26.7% of consumers say they applied for a new credit card during the prior 12 months, up 3.6% points vs. the year prior. Somewhat surprisingly, approval rates also increased, according to the survey. Some 18.5% of respondents said their applications were denied, which is a (2.4)% point decline vs. last year.

The survey comes on the heels of last week’s Fed data showing total revolving balances hitting  a 20-year high. While anxiety about the economy remains high, consumers seem willing to keep opening their wallets. Although the demand for new credit cards increased, application rates for auto loans decreased and mortgages plummeted.

Biden Admin Extends Student Loan Pause as Courts Block Debt Cancellation Plan

Last week, the Biden administration’s plan to cancel $10,000-$20,000 for many federal student loan borrowers was dealt a setback. Two separate federal courts have made rulings favorable to plaintiffs challenging the legality of the administration’s plan. Multiple states are seeking to block the debt forgiveness plan, with the core of the argument being that the executive branch lacks the statutory authority to implement it.

The Biden administration said it will extend the pause on federal student loans, as the program is tied up in the courts. If the litigation is resolved, the payment pause will terminate 60 days later. However, if the litigation is not resolved by June 30th, payments will resume 60 days later.

Trying to attack the problem from a different angle, the Biden administration has modified rules to make it easier for borrowers to discharge student loan debt in bankruptcy. The policy changes should make it easier for borrowers to demonstrate they are facing economic distress, which is a requirement to eliminate most student loans in typical bankruptcy proceedings. However, advocates warn that this approach is likely to be applied unevenly across presidential administrations.

Despite Challenging Funding Climate, Deals Still Getting Done

In 2022, the unpredictable climate has spooked VC investors as fintechs face many macroeconomic headwinds that include inflation, rising interest rates, white collar layoffs, and a potential recession. FT Partners tracker shows dollar funding volumes in fintech deals at about a third of what they were in 2021.

Despite the challenging environment and the softening of fintech valuations, there was good news last week for several fintechs. PayZen, Taktile, Prosper, Novo and Daylighthave all announced new funding rounds.

PayZen, which launched last year, “pays hospitals upfront for patient invoices and offers patients zero-interest, fee-free payment plans.” So, basically BNPL for hospital bills. PayZen argues that this allows hospitals to provide more affordable healthcare options. In the midst of an influx of medical bankruptcies in the U.S., PayZen announced it has raised $20Mn in equity and a $200Mn debt facility to expand its financing options to patients.

Taktile, a “no code” decision automation platform, announced it has raised a $20Mn Series A. The round was co-led by Index Ventures and Tiger Global. Taktile aims to empower non-technical employees to build, adjust, and evaluate decision flows, without needing to rely on engineering teams. According to the company, this enables companies to improve decision accuracy and risk selection in a shorter amount of time.

Prosper, the original peer-to-peer lender, announced it has raised $75Mn in growth capital from Neuberger Berman. The company says the additional funding will help it to meet “strong consumer demand” across its product portfolio, which includes personal loans, credit cards, home equity, and investment products. Prosper continues to offer a platform for retail investors to fund personal loans, whereas competitor LendingClub shut down its retail platform after becoming a bank via its acquisition of Radius.

Daylight, a neobank targeting LGBTQ+ community, also announced it had raised fresh financing. The company announced a $15Mn Series A led by Anthemis Group. The news comes at a time when investors have generally become pretty bearish about consumer fintech, including interchanged-dependent neobanks. Daylight also announced a new feature dubbed Daylight Grow, a set of capabilities designed for users looking to build a family. While not explicitly “financial,” the offering aims to help with thorny issues around adoption and surrogacy, including legal and insurance needs.

Lastly, Novo, a neobank for businesses, raised $35Mn in a Series B extension from GGV capital. Novo did so while increasing its valuation from $610Mn to $720Mn, seemingly a rarity these days. Novo is projecting revenue of $20Mn for 2022, up significantly from the $8Mn it did in 2021.

FTX Drama Continues

It shouldn’t be a surprise that when a company once valued at $32Bn implodes in fantastic fashion, it can take a while to sort through the rubble. According to recent filings in FTX’s bankruptcy proceedings, each of the top 10 creditors are owed at least $100Mn, which totals to more than $1.45Bn combined. The single largest creditor is owed some $276Mn. It’s rumored that Genesis, another crypto firm now facing an uncertain future, may be the third largest creditor, which is owed approximately $174Mn.

In total, there could be over a million creditors as part of FTX’s bankruptcy proceedings as, so far, cryptocurrency holders who held their assets on an exchange like FTX are treated as unsecured creditors in bankruptcy proceedings.

Meanwhile, a lawyer representing FTX says a “substantial amount” of the firm’s assets are missing or stolen. Given the size, complexity, and novelty of the case, it seems unlikely to be resolved any time soon.

In the News:

FTX Gives Congress a Reason to Rein in Crypto. The Question is How. (American Banker, 11/18/2022) There is a split between Congress of those who want to give crypto firms similar rights to banks and skeptics who are looking to cull crypto activity.

Senate Democrats Question if SoFi's Crypto Activities Violate Banking Obligations (American Banker, 11/21/2022) SoFi has two years, as of January 2022, to divest from SoFi Digital Assets.

ADP Adds Earned Wage Access to Payment Platform (PYMNTS, 11/17/2022) The EWA feature is offered in partnership with DailyPay.

Carvana Faces Cash Crunch From High Debt, Rising Interest Rates (Wall Street Journal, 11/21/2022) Carvana's cost to finance car purchases is up 75% this year and some of its real estate has lost value.

JPMorgan Granted Crypto Wallet-Related Trademark (Finextra, 11/22/2022) The trademark is registered for "virtual currency transfer and exchange, crypto payment processing, virtual checking accounts, and financial services".

Anti-Woke Bank GloriFi to Shut Down (Wall Street Journal, 11/21/2022) Texas startup that aimed to build a conservative banking alternative will shut down after funding fell through.

Varo Bank Signs on As the First Digital Bank to Join the Zelle P2P Payments Network (Digital Transactions, 11/15/2022) Varo CEO Colin Walsh attributes this accomplishment to its "bank charter in action".

Fintech Giant FIS to Cut Thousands of Jobs as New CEO Targets Costs (Bloomberg, 11/22/2022) Cuts expected to be gradual and may affect several thousand staffers and contractors.

Lighter Fare:

Scientists Are Investigating Signs of Ancient Human Civilization Underwater (Vice, 11/22/2022) An underwater "Stonehenge" stretches for miles under a lake in Europe.