States are leading the charge on crypto bank charters. Embed raises $60Mn. Credit unions struggle with excess deposits. Synchrony partners with Fiserv on BNPL. CEO of brokerage fintech M1 buys a bank. FP&A automation startup Trovata raises $20Mn. Goldman and Amex team up on cash management. Why is PayPal buying Pinterest?

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Macro Highlights

Initial unemployment numbers hit a fresh pandemic low of 290,000 last week, while Fed staff projections show inflation slowing to below 2% for 2022 amidst supply chain bottlenecks that may extend well into 2022 or 2023.

States Leading the Way on Crypto Charters as NY Cracks Down on “Interest” Products

In the absence of serious federal regulatory or legislative progress toward a charter for crypto firms, individual states are taking the lead. Wyoming and Nebraska have already implemented “special-purpose” bank charters governing crypto companies. Illinois legislators have proposed legislation to do the same, though it has not yet been approved. New York offers its “BitLicense,” which isn’t a bank charter per se, but allows for virtual currency business activities and limited-purpose trusts.

Part of the appeal of obtaining a special-purpose charter is direct access to the Fed’s payment rails. Kraken and Avanti, both of which obtained Wyoming licenses, have applied and are awaiting approval for Fed master accounts, which are necessary to access the payments system.

Meanwhile, state regulator crackdowns on crypto firms offering “interest” products continues. Last week, New York’s attorney general ordered two unnamed firms to halt operations in the state. The AG accused the firms of illegally selling securities without being registered with the state to do so.

Retail and institutional interest in the crypto sector continue to escalate, as evidenced by robust trading activity in the first bitcoin ETF that launched this week. The sharp escalation in prices and activity in the sector have heightened regulator focus on the sector, a change that is unlikely to reverse soon.

Excess Deposits Pose Regulatory Quandary for CUs

It’s no secret that financial institutions have seen a surge in deposits amidst the pandemic, driven by various government spending programs and fewer opportunities for consumer spending. The same underlying trends have also suppressed demand for the loans those growing deposits would normally go towards funding.

Credit unions have been putting those excess deposits to work in low yield investments like Treasury bills, but they’re still required to hold capital against their growing pile of investments. But credit unions have fewer options than banks to raise capital. They generally rely on retained earnings to grow capital. This has put credit unions in a bind, as they risk becoming less than well-capitalized because of declining net worth ratios.

Image: American Banker

Goldman, Amex Team Up on Cash Management

Goldman’s transaction banking unit, the commercial equivalent of its Marcus retail initiative, is teaming up with American Express. The partnership will see Goldman integrate virtual card technology from Amex into its platform. The integration will enable Goldman’s cash management customers to seamlessly use a corporate Amex to pay bills and suppliers within Goldman’s platform.

Strategically, this is potentially a customer acquisition vector for Goldman’s relatively new cash management offering. For Amex, the partnership helps protect from having its customer base picked off by trend upstarts like Brex and Ramp.

Is PayPal Buying Pinterest?

PayPal is in discussion to acquire Pinterest, according to reports. The deal would value the social media company around $39Bn. The potential deal, if it comes to fruition, would be the latest in an aggressive series of moves PayPal has taken recently to re-position itself as a “super app.” The company has launched or announced products including BNPL, savings accounts, crypto, and stock trading in recent months. Acquiring Pinterest would enable PayPal to move “up funnel” by integrating itself in the social shopping experience. BNPL competitors like Klarna and Affirm and social media sites like Facebook have been early movers in building or partnering with others to leverage the social shopping trend.

Synchrony Leverages Clover POS Terminal As It Joins Other Big Banks in Pursuing BNPL

Synchrony, a long-time issuer of private label credit cards, has announced it is extending its strategic partnership with Fiserv to beef up its ability to offer credit via small businesses. The expanded partnership will enable SMBs that use the Clover point-of-sale terminal to access Synchrony products and services and to accept private label credit cards. Example use cases include auto repair shops or retail businesses offering products from short-term “split pay” style financing to longer-term loans to their customers at the point of sale.

Synchrony is far from the only establishment player building out buy now, pay later offerings to compete with fast-growing and highly valued startups like Affirm and Klarna. In recent months, Goldman and Apple have announced they’re working on a BNPL offering, presumably to be integrated into Apple’s Wallet application. Establishment banks and credit card issuers like Citizens, Barclays, Capital One, U.S. Bancorp, and Chase have made clear they view BNPL as a threat, and begun rolling out various tests and products to better compete in the space. 

Buy now, pay later is clearly here to stay. As establishment players come to terms with this, expect more of them to offer some type of BNPL solution to their users in an effort to retain share of wallet.

Embed Raises $60Mn, Has Approval to Launch

Embed, a modern clearing and custody platform, announced it has raised $60Mn, comprised of $20Mn in equity and a $40Mn flexible debt facility. The company has also been approved as a member of Nasdaq, a correspondent member of the National Securities Clearing Corporation, and a custody member of the Depository Trust Company.

With the capital and approvals in hand, Embed says it is ready to launch with its early clients in Q4 and to scale the business.

The “plumbing” of the trading sector is an area that receives scant attention, when it is working as intended. This year’s “meme stock” craze, and particularly Robinhood’s difficulty supporting trades in Gamestop and AMC, have drawn attention to inefficiencies and risks in market function. Startups like Embed look to capitalize on this by offering modern clearing and settlement infrastructure.

Wells Fargo Invests in FP&A Automation Platform Trovata

Despite the growing array of fintech tools, many businesses still turn to a trusty mainstay to aggregate and analyze cash balances and transaction data: Excel. Trovata aims to change that.

The company offers a set of tools to automate cash reporting, forecast, and analysis for large and midsize companies. The company announced a $20Mn Series A last week, led by Wells Fargo Strategic Capital and with participation from JP Morgan and Capital One Ventures, among others. Wells Fargo plans to refer relevant commercial customers to the platform.

With the growth in the amount and ease of accessing data, platforms like Trovata offer the alluring possibility of automating previously manual, potentially error-prone processes.

Brokerage App M1 Latest to Buy a Bank

The trend of fintechs becoming or buying banks continues (sort of). Brian Barnes, CEO of fintech brokerage app M1 Finance, bought a tiny Minnesota bank. The First National Bank of Buhl boasts just $29.4Mn in deposits, making it one of the smallest banks in the US. M1, which has expanded beyond investing to include borrowing and spending, currently works with partner banks Celtic and Lincoln Savings for its credit card and debit/spending account, respectively. Barnes’ bank will work with M1 to originate personal loans and, eventually, mortgages and auto loans.

M1 joins other fintechs and startups like Square, Jiko, SoFI, and Varo in becoming or buying a bank.

Volatile Week for Earnings as Consolidation Continues

This week we had a large divergence in earnings reactions, as AmEx, Citizens and Synchrony popped on earnings (+5.4%, +3.6%, +2.7%, respectively), while Ally, Discover, and OneMain slumped ((5.7)%, (6.1)%, (8.2)%, respectively).

AmEx earnings confirmed a continued rebound in spending, with network volumes up 4.6% and average spend per basic card member up 3.6% from the second quarter. Management indicated that restaurant spending was “notably resilient, growing above pre-pandemic levels in the quarter” as well as being the largest category in the T&E segment. The return to spend has been driven by the younger generations, with Millennials + Gen-Z spending well above 2019 levels while Baby Boomers’ spending has not yet recovered.

Source: 3Q21 American Express Earnings Presentation

Building on last week’s bank results, Citizens reported an increase in average loans and YoY, +1.8%, but a decrease, (0.6)%, QoQ as CEO Bruce Van Saun explains that loan volume was, “held back a modest amount in Q3 by impacts from the Delta variant on the recovery as well as by supply chain issues and labor shortages.” On the bright side, he noted that, “These impacts should continue to abate going forward and we expect even faster loan growth in Q4.”

The red-hot BNPL market continued to surge, with Citizens CEO Bruce Van Saun reporting that, “…the growth in Citizens Pay has been pretty substantial. So all things kind of Buy Now Pay Later is up around 40% year-over-year with balances. And we continue to see that accelerate. “

Although BNPL has seemingly taken over every corner of the financial sector, Discover CEO Roger C. Hochschild is not worried about its impact on its company’s products, stating, “I would say, the [BNPL] market is not yet mature. And I think market clearing economics have yet to be established… But right now, I would say, we are not seeing any noticeable impact on revolving loans and believe that we are well positioned to respond if it does emerge.”

We continue to see companies adding product offerings, attempting to become “one-stop shops” for consumer’s financial needs. Synchrony, Ally and OneMain all expanded their card offerings, albeit through different ways.

Synchrony announced a strategic partnership with Fiserv’s Clover POS platform, allowing merchants to accept private label cards issued by Synchrony and offer customers access to revolving credit, short-term and long-term installment loans. Additionally, it launched two retail health and wellness credit cards in a partnership with Walgreens.

Ally expanded into the credit card market with its announcement of the acquisition of Fair Square Financial, a card tech company aimed at near-prime consumers, for $750Mn. Ally thinks highly of Fair Square’s digital-first model, with Jennifer LaClair, CFO, reporting that, “Fair Square is through the J-curve and they’ve established four meaningful products, and you can see how successful they’ve been with those products with 60%+ active account growth and over 70% loan growth.” 

Fair Square had previously received equity backing from private equity firm Pine Brook as well as investment firm Orogen Group. Congratulations to Rob Hapgood and the Fair Square team on their acquisition!

Source: 3Q21 Ally Earnings Presentation

OneMain initiated the roll-out of its BrightWay credit cards, which are, “designed specifically for the non-prime consumer by reinforcing credit building behaviors.” The cards offer benefits such as credit limit increases and APR decreases as incentives for making on-time payments. As well as the credit cards, OneMain announced its progress towards integrating Trim, its financial wellness fintech that it aims to offer customers by the first quarter of 2022.

Even with the product expansions, OneMain’s stock was hammered on earnings, as analysts were concerned with their non-prime card offering and nearly ~30% QoQ increase in 30-89 days delinquent loans.

Source: Google Finance, PeerIQ

In The News:

PNC’s Chief Executive Warns of Threat From Stablecoins (American Banker, 10/15/2021) CEO Bill Demchak highlights concerns from the rise of stablecoins from suspicious collateral as well as decreased control of the money supply.

Jack Dorsey says Square May Build a Bitcoin Mining System, Adding to Bitcoin Price Surge (CNBC, 10/15/2021) Dorsey aims to make crypto mining more accessible through a system based on custom silicon and open source.

Klarna Overhauls UK ‘Buy Now, Pay Later’ Service Ahead of Crackdown (Financial Times, 10/17/2021) Klarna introduces wording to make clear that customers are being offered credit, and adds a “pay now” option alongside its installment offerings.

Google Partners with Bitcoin and Crypto Marketplace Bakkt (Bitcoin Magazine, 10/11/2021) The partnership will allow Bakkt users to add their virtual Visa Debit cards into Google Pay, with bitcoin payments converted into fiat to make these purchases.

Walmart, With Eyes on Amazon, Tries to Build a Fintech Startup (Wall Street Journal, 10/15/2021) Walmart is helping to launch a company, which will be a joint venture with Ribbit Capital, that aims to provide financial services for its millions of customers and workers.

Challenger Bank N26 Raises $900 Million at $9 Billion Valuation (Tech Crunch, 10/18/2021) Third Point Ventures and Coatue Management led the funding round for the digital bank which offers bank accounts and debit cards via a mobile app to 7Mn clients across 25 countries.

Pagaya Partners With SoFi to Expand Access to Financial Services and Create Opportunities for Customers (Business Wire, 10/18/2021) The partnership will leverage SoFi’s platform, strong brand and consumer appeal to originate loans through Pagaya’s AI network.

Fintechs Team Up to Bring Crypto to Credit Unions (American Banker, 10/19/2021) Credit unions have felt held back by unclear crypto regulation and outdated technology.

Lighter Fare:

Billionaire ex-Walmart Exec Says the First ‘Settlers’ of his Planned $400 Billion City ‘Telosa’ Will Likely be Selected Through Applications — and they could move in by 2030 (Business Insider, 10/18/2021) The plan is to select 50,000 applicants to move into a futuristic utopia built around the concept of “equitism”, a mix of equality and capitalism.