Happy Sunday,
Job openings fall. Rates likely to stay higher for longer. DOJ investigates Block. Ansa raises $14Mn. Baselayer emerges from stealth. Backflip announces $15Mn Series A. Republic First seized, sold. Goldman looks to offload GM card. Fintech lenders report earnings.
New here? Subscribe here to get our newsletter each Sunday. For even more updates, follow us on LinkedIn (PeerIQ by Cross River).
Job Openings Fall
Job openings fell to their lowest level in three years, dropping to 8.49Mn in March from 8.81Mn the month prior. Both quits and hiring slowed, showing some softening the job market. But despite the slight slowdown in employment, there are signs of lingering inflation, including wage growth. The Labor Department’s Employment Cost Index, which measures how much employers spend on compensation, rose 1.2% in the first quarter, outpacing analysts’ expectations of a 1% increase. Meanwhile, the Fed acknowledged that the fight against inflation has stalled, but signaled the central bank is likely to keep rates higher for longer rather than raise them further.
Image: Bloomberg
DOJ Investigating Square, Cash App
The Department of Justice is investigating Block for allegedly processing crypto transactions for terrorist groups and potential sanctions violations. NBC News spoke to a former Block employee, who has met with prosecutors for the Southern District of New York, and reviewed documents the former employee provided NBC. The documents showed a number of small transactions involving entities in sanctioned countries, including Cuba, Russia, Iran, and Venezuela, most of which were not reported to FinCEN, according to NBC. In its Square business unit, the company is alleged to have failed to conduct basic due diligence on international merchants and improperly reimbursed some merchants’ funds when they were frozen for sanctions violations. Block’s senior management and its board of directors were aware of the problems, according to the former employee. High-profile board member Larry Summers, a former Treasury Secretary, stepped down in February, and another director, Sharon Rothstein, will not stand for reelection, though it is unknown if either decision is related to Block’s alleged compliance problems. One of Block’s partner banks, Sutton, which issues Cash App’s prepaid debit cards, recently reached a consent order with the FDIC over violations of the Bank Secrecy Act.
Ansa Raises $14Mn for Wallets-as-a-Service
Wallet-as-a-Service startup Ansa, led by veterans of Adyen and Affirm, announced it has raised a $14Mn Series A. The round was led by Renegade Partners, with participation from Bain Capital Ventures, BoxGroup, and B37 Ventures. Ansa provides white label digital wallet infrastructure, enabling merchants or brands to quickly and easily launch flexible payment instruments. Merchants can also design rewards, loyalty programs, and other incentives tied to their branded wallets. Ansa is targeted quick service restaurants, coffee shops, marketplaces, retail, and convenience stores as initial verticals. The new funding will go primarily to hiring engineering resources and continuing to develop its product, the company said.
Baselayer Emerges from Stealth with $6.5Mn Seed Round
Baselayer, a business risk and identity platform, emerged from stealth and announced it has raised a $6.5Mn seed round. While numerous incumbent and startup companies focus on identity, fraud, and credit risk solutions in the consumer space, the business space has been relatively underserved, Baselayer cofounder and CEO Jonathan Awad argues. The result is inefficient, manual processes, elevated rates of fraud losses, and reduced inclusion and access to financial services, particularly for smaller and more recently formed businesses. The company already boasts some 20 customers, enabling potential reach to 25Mn business accounts. The round was led Torch Capital with participation from Gilgamesh Ventures, Afore Capital, Picus Capital, Founder Collection, and angel investments from industry veterans like Eric Woodward, Jason Mikula, and Stuart Cook.
Backflip Scores $15Mn Series A
Proptech platform Backflip, which aims to be a cross between Zillow and Shopify for house flippers, announced it has raised a $15Mn Series A. The round was led by FirstMark Capital, with participation from LiveOak Venture Partners, Vertical Venture Partners, Revel Partners, ECMC, and others. Backflip offers 12-month bridge loans, which typically carry a rate several points above a standard residential mortgage, given the increased risk profile. In addition to helping flippers borrow money for their projects, Backflip provides tools to source, track, and compare potential investment properties. Since launching in mid-2022, the company has funded over 900 home purchases, with users realizing on average a gross profit of $82,000 per property, according to the company.
Republic First Seized, Sold to Fulton Bank
Republic First (no relation to First Republic) has been seized by the FDIC, with Fulton Bank assuming substantially all of the assets and deposits of the bank. The parent company of Republic First has been in turmoil since the end of 2021, when activist investors tried to force a sale of the bank. The seizure and sale to Fulton come after Republic First attempted but failed to raise a fresh $125Mn in additional capital. Republic First had about $425Mn in unrealized losses in its bond portfolio, an issue also faced by other recent banks that failed. The FDIC’s Deposit Insurance Fund is expected to take a $667Mn hit from Republic’s failure.
Goldman Looks to Offload GM Card
Goldman Sachs’ slow-but-steady dismantling of its consumer business continues. This time, with the possible sale of its GM credit card business to major co-brand issuer Barclays. Goldman’s GM portfolio has about $2Bn in loans outstanding, down about $1Bn from when Goldman took on the business. The credit quality of customers onboarded since Goldman took over the program also appears to be lower, with higher rates of missed payments compared to the portfolio originated by GM’s prior issuer, Capital One. Barclays was also a bidder in the 2020 process that ultimately saw the GM card business go to Goldman. One major question is the price Barclays would pay. As of now, there is no guarantee Goldman and Barclays will come to terms and be able to finalize a deal.
Fintech Lenders Report Earnings
Source: Yahoo Finance
This week, consumer lenders reported earnings, with originations up +22.4% at SoFi, while originations fell (28.1)% at LendingClub and personal loan originations fell (10.4)% at OneMain from the prior year. The YoY declines by OneMain and LendingClub were driven by continued credit tightening actions.
Specifically, SoFi’s personal loan originations grew 11% YoY, student loan originations grew 43% YoY and home loan originations grew 274% YoY.
Block saw continued strong demand for its Cash App Borrow (short-term loans) product, with COO/CFO Amrita Ahuja reporting that originations were up more than 2x YoY. Additionally, she conveyed the cross-sell opportunities of the product, noting that, “We see nearly 40% of Borrow monthly actives making a transaction on Cash App Card after receiving a Borrow loan. And we’ve seen strong conversion rates from those offered loans and repeat usage.” According to management, they see repeated usage, as people use Borrow as a sort of cash flow management product.
Block’s BNPL GMV grew 25% YoY, to $6.98Bn, with the growth driven by Single Use Payments (“SUP”s), which enables customers to BNPL at both in-network and out-of-network merchants from within the Afterpay app, and Gift Cards.
On the SMB side, Block’s Square Loans (small business loans) facilitated 129,000 loans, totaling $1.32Bn in originations in Q1 up 17% YoY.
Despite lower originations, OneMain’s managed receivables grew 6.3% YoY. Net finance receivables accounted for 96% of that total, with 4% serviced for whole loan partners. Of the $21,267Mn of average net receivables, 98% came from personal loans while just 2% came from credit cards.
Turning to deposits, Block noted that since it began to roll out a Savings Yield feature in January, eligible actives have deposited more than $1Bn into their Savings accounts. SoFi +16.1% and LendingClub +2.6% both grew their deposits from the prior quarter. SoFi paid an average yield of 4.29% on interest-bearing deposits (+1 bp QoQ) and LendingClub paid an average yield of 4.74% on interest-bearing deposits (+19 bps QoQ), highlighting that deposit growth comes at a cost as consumers seek yield.
Specifically, LendingClub attributed the growth in deposits to an increase in high-yield savings and CDs, partially offset by a decrease in brokered deposits. SoFi reported a (1.0)% QoQ decline in demand deposits (avg. yield 1.81%), but a +22.7% QoQ growth from savings deposits (avg. yield 4.56%), and +9.4% QoQ growth from time deposits (avg. yield 5.08%), further showcasing consumer’s move into higher yielding options.
While deposit costs have risen, they represent a cheaper form of loan funding than warehouse facilities, with SoFi CFO Chris Lapointe noting, “The 226 basis points of cost savings between our deposits and our warehouse facilities continues to support our net interest margin and translates to nearly $500 million of annualized interest expense savings at our current deposit base.”
LendingClub’s NCO ratio rose to 6.9%, from 3.8% a year prior and 6.6% a quarter prior, but as a lagging indicator, management expects it come down as the company leans more on structured certificates (in which it retains the senior portion and sells the residual portion).
Similarly, OneMain’s NCOs continued to rise to 8.6% for the quarter, an increase from 7.7% a year prior and from 7.7% a quarter prior. While NCOs rose, they are expected to peak in 1H24, due to the reduced size of “front book” (post-Aug 2022 credit tightening) originations.
In the News:
SBA’s push to revive an old idea (American Banker, 4/29/2024) The Small Business Administration revisits a plan to make its own loans under its 7(a) program.
Custodia Bank Appeals Court Loss in Fed Master Account Lawsuit (Coindesk, 4/26/2024) Custodia is appealing in its fight to get a Fed master account.
FDIC sides with Colorado in court tussle over high-cost loans (American Banker, 4/28/2024) The FDIC has filed an amicus brief supporting Colorado’s position in a fight over high-APR lending in the state.
UMB Financial to acquire Heartland Financial for $2 billion (American Banker, 4/29/2024) The all-stock deal will create a $64.5Bn asset bank spanning 13 states.
Hope Bancorp to buy Hawaii bank in $79 million deal (American Banker, 4/29/2024) $18Bn asset Hope is acquiring Territorial Bancorp in Hawaii for $79Mn.
Binance founder Changpeng Zhao sentenced to 4 months in prison after plea deal (CNBC, 4/30/2024) Prosecutors sought a 36-month jail term, but the judge sentenced Zhao to just four months.
BNPL firm Sezzle turns to gamification to encourage timely payments (Finextra, 5/1/2024) Sezzle looks to use behavioral psychology techniques to encourage on-time payments.
Lighter Fare:
Quieting your mind to meditate can be hard. Here’s how sound can help. (NatGeo, 4/29/2024) Sound therapy can help with meditation, focus, and stress relief.